UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)  
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014  
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                    to                     

Commission File Number 001-33135
 
AdCare Health Systems, Inc.
(Exact name of registrant as specified in its charter) 
Georgia
 
31-1332119
(State or other jurisdiction
of incorporation)
 
(I.R.S. Employer Identification Number)
  1145 Hembree Road, Roswell, GA 30076
(Address of principal executive offices)
 
(678) 869-5116
(Registrant’s telephone number, including area code)
 
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý   No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ý   No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company x
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  ý
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
As of October 31, 2014 :  18,878,571 shares of common stock with no par value were outstanding.


Table of Contents



AdCare Health Systems, Inc.
 
Form 10-Q
 
Table of Contents
 
 
 
Page
  Number
FINANCIAL INFORMATION
 
 
 
 
Financial Statements (Unaudited)
 
Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013
 
Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013 (unaudited)
 
Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2014 (unaudited)
 
Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (unaudited)
 
Notes to Consolidated Financial Statements (unaudited)
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Controls and Procedures
 
 
 
OTHER INFORMATION
 
 
 
 
Legal Proceedings
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults upon Senior Securities
Mine Safety Disclosures
Other Information
Exhibits
 
 
 

2
Table of Contents



Forward-Looking Statements
 
This Quarterly Report on Form 10-Q (this "Quarterly Report") and certain information incorporated herein by reference contain forward-looking statements and information within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This information includes assumptions made by, and information currently available to management, including statements regarding future economic performance and financial condition, liquidity and capital resources, and management’s plans and objectives. In addition, certain statements included in this Quarterly Report, in the Company’s future filings with the Securities and Exchange Commission (“SEC”), in press releases, and in oral and written statements made by us or with our approval, which are not statements of historical fact, are forward-looking statements. Words such as “may,” “could,” “should,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “seeks,” “plan,” “project,” “continue,” “predict,” “will,” “should,” and other words or expressions of similar meaning are intended by us to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Forward-looking statements are based on the Company’s current expectations about future events or results and information that is currently available to us, involve assumptions, risks, and uncertainties, and speak only as of the date on which such statements are made. 
All forward-looking statements are subject to the risks and uncertainties inherent in predicting the future.  The Company’s actual results may differ materially from those projected, stated or implied in these forward-looking statements as a result of many factors, including the Company’s critical accounting policies and risks and uncertainties related to, but not limited to, overall industry environment, regulatory delays, negative clinical results, and the Company’s financial condition.  These and other risks and uncertainties are described in more detail in the Company’s most recent Annual Report on Form 10-K, as well as other reports that the Company files with the SEC. 
Forward-looking statements speak only as of the date they are made and should not be relied upon as representing the Company’s views as of any subsequent date.  The Company undertakes no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur, except as required by applicable laws, and you are urged to review and consider disclosures that the Company makes in this Quarterly Report and other reports that the Company files with the SEC that discuss factors germane to the Company’s business.

3
Table of Contents



Part I.  Financial Information  
Item 1.  Financial Statements 
ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in 000’s)
 
 
September 30, 
 2014
 
December 31, 
 2013
 
 
(Unaudited)
 
 
ASSETS
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
12,867

 
$
19,374

Restricted cash and investments
 
921

 
3,801

Accounts receivable, net of allowance of $6,202 and $4,989
 
25,771

 
23,598

Prepaid expenses and other
 
2,198

 
483

Assets of disposal group held for use
 
—

 
5,135

Assets of disposal groups held for sale
 
7,045

 
400

Assets of variable interest entity held for sale
 
5,894

 
5,945

Total current assets
 
54,696

 
58,736

 
 
 
 
 
Restricted cash and investments
 
7,773

 
11,606

Property and equipment, net
 
136,572

 
138,233

Intangible assets - bed licenses
 
2,471

 
2,471

Intangible assets - lease rights, net
 
4,254

 
4,889

Goodwill
 
4,224

 
4,224

Lease deposits
 
1,832

 
1,715

Deferred loan costs, net
 
3,948

 
4,542

Other assets
 
93

 
12

Total assets
 
$
215,863

 
$
226,428

 
 
 
 
 
LIABILITIES AND EQUITY
 
 

 
 

 
 
 
 
 
Current liabilities:
 
 

 
 

Current portion of notes payable and other debt
 
$
24,249

 
$
12,027

Current portion of convertible debt, net of discounts
 
14,000

 
11,389

Revolving credit facilities and lines of credit
 
6,894

 
2,738

Accounts payable
 
17,729

 
23,783

Accrued expenses
 
15,644

 
13,264

Liabilities of disposal group held for sale
 
5,197

 
—

Liabilities of variable interest entity held for sale
 
5,954

 
6,034

Total current liabilities
 
89,667

 
69,235

 
 
 
 
 
Notes payable and other debt, net of current portion:
 
 

 
 

Senior debt, net of discounts
 
86,832

 
107,858

Bonds, net of discounts
 
7,007

 
6,996

Revolving credit facilities
 
1,121

 
5,765

Convertible debt
 
—

 
7,500

Other liabilities
 
1,916

 
1,589

Deferred tax liability
 
—

 
191

Total liabilities
 
186,543

 
199,134

 
 
 
 
 
Commitments and contingencies (Note 14)
 

 

 
 
 
 
 
Preferred stock, no par value; 5,000 shares authorized; 950 shares issued and outstanding, redemption amount 23,750 at both September 30, 2014 and December 31, 2013
 
20,392

 
20,442

 
 
 
 
 
Stockholders’ equity:
 
 

 
 

Common stock and additional paid-in capital, no par value; 55,000 shares authorized; 18,811 and 16,016 issued and outstanding at September 30, 2014 and December 31, 2013, respectively
 
61,251

 
48,370

Accumulated deficit
 
(50,141
)
 
(39,884
)
Total stockholders’ equity
 
11,110

 
8,486

Noncontrolling interest in subsidiary
 
(2,182
)
 
(1,634
)
Total equity
 
8,928

 
6,852

Total liabilities and equity
 
$
215,863

 
$
226,428

 See accompanying notes to unaudited consolidated financial statements

4
Table of Contents



ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in 000’s, except per share data)
(Unaudited) 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 

 
 

 
 

 
 

Patient care revenues
 
$
56,637

 
$
53,126

 
$
165,196

 
$
160,471

Management revenues
 
354

 
521

 
1,140

 
1,529

Rental revenues
 
88

 
—

 
88

 
—

Total revenues
 
57,079

 
53,647

 
166,424

 
162,000

 
 
 
 
 
 
 
 
 
Expenses:
 
 

 
 

 
 

 
 

Cost of services (exclusive of facility rent, depreciation and amortization)
 
47,198

 
43,802

 
137,743

 
134,392

General and administrative expenses
 
3,578

 
4,583

 
12,318

 
14,016

Audit committee investigation expense
 
—

 
302

 
—

 
2,284

Facility rent expense
 
1,695

 
1,702

 
5,085

 
5,077

Depreciation and amortization
 
1,906

 
1,779

 
5,716

 
5,245

Salary retirement and continuation costs
 
1,489

 
5

 
2,771

 
154

Total expenses
 
55,866

 
52,173

 
163,633

 
161,168

Income from Operations
 
1,213

 
1,474

 
2,791

 
832

 
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 

 
 

 
 

 
 

Interest expense, net
 
(2,644
)
 
(3,204
)
 
(7,916
)
 
(9,459
)
Acquisition costs, net of gains
 
(8
)
 
(33
)
 
(8
)
 
(610
)
Derivative gain
 
—

 
1,989

 
—

 
2,178

Loss on extinguishment of debt
 
(1,220
)
 
(6
)
 
(1,803
)
 
(33
)
Loss on disposal of assets
 
—

 
(6
)
 
—

 
(10
)
Other (expense) income
 
(444
)
 
15

 
(636
)
 
15

Total other expense, net
 
(4,316
)
 
(1,245
)
 
(10,363
)
 
(7,919
)
 
 
 
 
 
 
 
 
 
(Loss) Income from Continuing Operations Before Income Taxes
 
(3,103
)
 
229

 
(7,572
)
 
(7,087
)
Income tax benefit (expense)
 
244

 
54

 
236

 
(24
)
(Loss) Income from Continuing Operations
 
(2,859
)
 
283

 
(7,336
)
 
(7,111
)
 
 
 
 
 
 
 
 
 
Loss from Discontinued Operations, Net of Tax
 
(690
)
 
(696
)
 
(1,531
)
 
(2,998
)
Net Loss
 
(3,549
)
 
(413
)
 
(8,867
)
 
(10,109
)
 
 
 
 
 
 
 
 
 
Net Loss Attributable to Noncontrolling Interests
 
218

 
195

 
548

 
629

Net Loss Attributable to AdCare Health Systems, Inc.
 
(3,331
)
 
(218
)
 
(8,319
)
 
(9,480
)
 
 
 
 
 
 
 
 
 
Preferred stock dividend
 
(646
)
 
(306
)
 
(1,938
)
 
(918
)
Net Loss Attributable to AdCare Health Systems, Inc. Common Stockholders
 
$
(3,977
)
 
$
(524
)
 
$
(10,257
)
 
$
(10,398
)
 
 
 
 
 
 
 
 
 
Net loss per Common Share attributable to AdCare Health Systems, Inc.
 
 

 
 

 
 

 
 

Common Stockholders -
 
 

 
 

 
 

 
 

Basic:
 
 

 
 

 
 

 
 

Continuing Operations
 
$
(0.18
)
 
$
0.01

 
$
(0.50
)
 
$
(0.50
)
Discontinued Operations
 
(0.04
)
 
(0.04
)
 
(0.09
)
 
(0.20
)
 
 
$
(0.22
)
 
$
(0.03
)
 
$
(0.59
)
 
$
(0.70
)
 
 
 
 
 
 
 
 
 
Diluted:
 
 

 
 

 
 

 
 

Continuing Operations
 
$
(0.18
)
 
$
0.01

 
$
(0.50
)
 
$
(0.50
)
Discontinued Operations
 
(0.04
)
 
(0.04
)
 
(0.09
)
 
(0.20
)
 
 
$
(0.22
)
 
$
(0.03
)
 
$
(0.59
)
 
$
(0.70
)
 
 
 
 
 
 
 
 
 
Weighted Average Common Shares Outstanding:
 
 

 
 

 
 

 
 

Basic
 
18,134

 
14,962

 
17,539

 
14,805

Diluted
 
18,134

 
14,962

 
17,539

 
14,805

 See accompanying notes to unaudited consolidated financial statements

5
Table of Contents



ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Amounts in 000’s)
(Unaudited)
 
 
Common
Stock
Shares
 
Common
Stock and
Additional
Paid-in Capital
 
Accumulated
Deficit
 
Noncontrolling
Interests
 
Total
Balances, December 31, 2013
 
16,016

 
$
48,370

 
$
(39,884
)
 
$
(1,634
)
 
$
6,852

 
 
 
 
 
 
 
 
 
 
 
Stock-based compensation expense
 
—

 
983

 
—

 
—

 
983

 
 
 
 
 
 
 
 
 
 
 
Exercises of options and warrants
 
934

 
3,105

 
—

 
—

 
3,105

 
 
 
 
 
 
 
 
 
 
 
Stock issued for converted debt and interest
 
1,861

 
8,706

 
—

 
—

 
8,706

 
 
 
 
 
 
 
 
 
 
 
Nonemployee warrants issued in conjunction with debt offering
 
—

 
87

 
—

 
—

 
87

 
 
 
 
 
 
 
 
 
 
 
Preferred stock dividend
 
—

 
—

 
(1,938
)
 
—

 
(1,938
)
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
—

 
—

 
(8,319
)
 
(548
)
 
(8,867
)
Balances, September 30, 2014
 
18,811

 
$
61,251

 
$
(50,141
)
 
$
(2,182
)
 
$
8,928

 
See accompanying notes to unaudited consolidated financial statements

6
Table of Contents



ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in 000’s)
(Unaudited) 
 
 
Nine Months Ended September 30,
 
 
2014
 
2013
Cash flows from operating activities:
 
 

 
 

Net loss
 
$
(8,867
)
 
$
(10,109
)
Loss from discontinued operations, net of tax
 
1,531

 
2,998

Loss from continuing operations
 
(7,336
)
 
(7,111
)
Adjustments to reconcile net loss from continuing operations to net cash (used in) provided by operating activities:
 
 

 
 

Depreciation and amortization
 
5,716

 
5,245

Warrants issued for services
 
87

 
9

Stock-based compensation expense
 
983

 
737

Lease expense in excess of cash
 
166

 
121

Amortization of deferred financing costs
 
1,460

 
1,727

Amortization of debt discounts and premiums
 
(13
)
 
502

Derivative gain
 
—

 
(2,178
)
Loss on debt extinguishment
 
1,803

 
33

Deferred tax benefit
 
(191
)
 
(27
)
Loss on disposal of assets
 
—

 
10

Provision for bad debts
 
2,995

 
3,156

Changes in certain assets and liabilities, net of acquisitions:
 
 

 
 

Accounts receivable
 
(5,430
)
 
(3,163
)
Prepaid expenses and other
 
(1,660
)
 
(965
)
Other assets
 
(198
)
 
387

Accounts payable and accrued expenses
 
(3,056
)
 
4,698

Net cash (used in) provided by operating activities - continuing operations
 
(4,674
)
 
3,181

Net cash used in operating activities - discontinued operations
 
(1,441
)
 
(493
)
Net cash (used in) provided by operating activities
 
(6,115
)
 
2,688

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Change in restricted cash and investments and escrow deposits for acquisitions
 
5,785

 
(5,632
)
Proceeds from notes receivable
 
—

 
3,240

Purchase of property and equipment
 
(3,420
)
 
(3,049
)
Net cash provided by (used in) investing activities - continuing operations
 
2,365

 
(5,441
)
Net cash (used in) provided by investing activities - discontinued operations
 
(778
)
 
886

Net cash provided by (used in) investing activities
 
1,587

 
(4,555
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Proceeds from debt
 
17,750

 
7,372

Proceeds from convertible debt
 
6,022

 
—

Repayment on notes payable
 
(18,484
)
 
(5,295
)
Repayment on bonds payable
 
(3,049
)
 
—

Repayment on convertible debt
 
(4,014
)
 
—

Change in lines of credit
 
(335
)
 
8

Debt issuance costs
 
(945
)
 
(407
)
Exercise of warrants and options
 
3,105

 
67

Preferred stock offering costs
 
(50
)
 
—

Dividends paid on preferred stock
 
(1,938
)
 
(918
)
Net cash flows (used in) provided by financing activities - continuing operations
 
(1,938
)
 
827

Net cash flows used in financing activities - discontinued operations
 
(41
)
 
(2,173
)
Net cash flows used in financing activities
 
(1,979
)
 
(1,346
)
Net Change in Cash
 
(6,507
)
 
(3,213
)
Cash, Beginning
 
19,374

 
15,937

Cash, Ending
 
$
12,867

 
$
12,724

 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 

 
 

Cash paid during the year for:
 
 
 
 
Interest
 
$
7,340

 
$
7,984

Supplemental disclosure of Non-cash Activities:
 
 
 
 
Conversions of debt and other liabilities to equity
 
$
6,942

 
$
2,331

2011 Notes surrendered and cancelled in payment for 2014 Notes
 
$
445

 
$
—

Warrants issued for financing costs
 
$
—

 
$
9

Warrants issued in conjunction with debt offering
 
$
87

 
$
—

  See accompanying notes to unaudited consolidated financial statements

7
Table of Contents



ADCARE HEALTH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2014 and 2013
 
NOTE 1.                           SIGNIFICANT ACCOUNTING POLICIES  

See Note 1 to our Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for a description of all significant accounting policies. 
Description of Business
 
AdCare Health Systems, Inc. (“AdCare”) and its controlled subsidiaries (collectively with AdCare, the “Company” or “we”), owns and operates skilled nursing and assisted living facilities in the states of Alabama, Arkansas, Georgia, Missouri, North Carolina, Ohio, Oklahoma and South Carolina. The Company, through wholly owned separate operating subsidiaries, as of September 30, 2014 , operates 37 facilities comprised of 34 skilled nursing facilities, two assisted living facilities and one independent living/senior housing facility totaling approximately 4,200 beds. The Company’s facilities provide a range of health care services to their patients and residents including, but not limited to, skilled nursing and assisted living services, social services, various therapy services and other rehabilitative and healthcare services for both long-term residents and short-stay patients. As of September 30, 2014 , of the total 37 facilities, the Company owned and operated 25 facilities, leased and operated eight facilities, and managed four facilities for third parties.
On June 12, 2013, the Company executed two sublease agreements to exit the skilled nursing business in Tybee Island, Georgia effective June 30, 2013 relating to two facilities. During the fourth quarter of 2013, Riverchase Village ADK, LLC ("Riverchase"), our consolidated variable interest entity (a "VIE"), entered into a sales listing agreement to sell Riverchase Village, a 105 -bed assisted living facility located in Hoover, Alabama. Riverchase subsequently entered into a purchase sale agreement on April 1, 2014 to sell Riverchase Village but the purchase sale agreement was terminated on August 6, 2014 (see Note 13 - Variable Interest Entity ). During the first quarter of 2014, the Company entered into a representation agreement to sell Companions Specialized Care Center ("Companions"), a 102 -bed skilled nursing facility located in Tulsa, Oklahoma. On July 1, 2014, the Company entered into an agreement effective July 1, 2014 to sublease a 52 -bed skilled nursing facility located in Thomasville, Georgia to a local nursing home operator. These five facilities are reported as discontinued operations (see Note 10 — Discontinued Operations ).  
On July 23, 2014, the Company announced that the Board of Directors had approved, and management had begun to implement, a strategic plan to transition the Company to a healthcare property holding and leasing company. Through a series of leasing transactions, the operations of the Company’s currently owned and operated healthcare facilities, which are principally skilled nursing facilities, will be transitioned to third parties, and the properties the Company leases will be sub-leased, effectively exiting the operations of these facilities, and will transition its business to the ownership, acquisition and leasing of healthcare-related properties.
On September 22, 2014, as part of its ongoing strategic plan to transition from an owner and operator of healthcare facilities to a healthcare property holding and leasing company, two wholly-owned subsidiaries of the Company entered into an agreement to lease two of its skilled nursing and rehabilitation facilities in Alabama to a local nursing home operator effective November 1, 2014.
On October 14, 2014, the Company held a special meeting of shareholders in Atlanta, Georgia, in which the shareholders approved the additional leasing transactions which transactions may constitute the lease of all or substantially all of the Company's property under Georgia law.
Basis of Presentation
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Article 8 of Regulations S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of Accounting Standards Updates (“ASUs”) to the FASB’s Accounting Standards Codification (“ASC”).  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results of operations for the periods presented have been included.  Operating results for the three and nine months ended September 30, 2014 and 2013 , are not necessarily indicative of the results that may be expected for the fiscal

8



year. The balance sheet at December 31, 2013 , has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements. 
You should read these consolidated financial statements together with the historical consolidated financial statements of the Company for the year ended December 31, 2013 included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 , filed with the Securities and Exchange Commission ("SEC") on March 31, 2014. 
The Company operates in one business segment. These statements include the accounts of AdCare Health Systems, Inc. and its controlled subsidiaries. Controlled subsidiaries include AdCare’s majority owned subsidiaries and one variable interest entity (a "VIE") in which AdCare has control as primary beneficiary. All inter-company accounts and transactions were eliminated in the consolidation. 
Use of Estimates
 
The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported results of operations during the reporting period. Examples of significant estimates include allowance for doubtful accounts, contractual allowances for Medicaid, Medicare, and managed care reimbursements, deferred tax valuation allowance, fair value of derivative instruments, fair value of employee and nonemployee stock based awards, and valuation of goodwill and other long-lived assets. Actual results could differ materially from those estimates. 
Reclassifications
 
Certain items previously reported in the consolidated financial statement captions have been reclassified to conform to the current financial statement presentation with no effect on the Company’s consolidated financial position or results of operations. These reclassifications did not affect total assets, total liabilities, or stockholders’ equity. Reclassifications were made to September 30, 2013 Consolidated Statements of Operations to reflect the same facilities in discontinued operations for both periods presented.
Revenue Recognition and Patient Care Receivables
The Company recognizes revenue when the following four conditions have been met: (i) there is persuasive evidence that an arrangement exists; (ii) delivery has occurred or service has been rendered; (iii) the price is fixed or determinable; and (iv) collection is reasonably assured. The Company's revenue is derived primarily from providing healthcare services to residents and is recognized on the date services are provided at amounts billable to the individual. For reimbursement arrangements with third-party payors, including Medicaid, Medicare and private insurers, revenue is recorded based on contractually agreed-upon amounts on a per patient, daily basis.
Revenue from the Medicaid and Medicare programs accounted for 83.5% and 83.9% of the Company’s revenue for the three and nine months ended September 30, 2014 , respectively, and 82.8% and 84.1% of the Company's revenue for the three and nine months ended September 30, 2013 . The Company records revenue from these governmental and managed care programs as services are performed at their expected net realizable amounts under these programs. The Company’s revenue from governmental and managed care programs is subject to audit and retroactive adjustment by governmental and third-party agencies. Consistent with healthcare industry accounting practices, any changes to these governmental revenue estimates are recorded in the period the change or adjustment becomes known based on final settlement. The Company recorded retroactive adjustments to revenue which were not material to the Company's consolidated revenue for the three and nine months ended September 30, 2014 and 2013 .
Potentially uncollectible patient accounts are provided for on the allowance method based upon management's evaluation of outstanding accounts receivable at period-end and historical experience. Uncollected accounts that are written off are charged against allowance. As of September 30, 2014 and December 31, 2013 , management recorded an allowance for uncollectible accounts of $6.2 million and $5.0 million , respectively. 
Management Fee Receivables and Revenues
 
Management fee receivables and revenue are recorded in the month that services are provided. As of September 30, 2014 and December 31, 2013 , the Company evaluated collectibility of management fees and determined that no allowance was required. 
Rental Revenues and Receivables

9




The Company, as lessor, makes a determination with respect to each of its leases whether they should be accounted for as operating leases. The Company recognizes rental revenues on a straight-line basis over the term of the lease when collectibility is reasonably assured. Differences between rental income earned and amounts due under the lease are charged or credited, as applicable, to straight-line rent receivable, net. Payments received under operating leases are accounted for in the statements of operations as rental revenue for actual rent collected plus or minus a straight-line adjustment for estimated minimum lease escalators.

Fair Value Measurements and Financial Instruments  

Accounting guidance establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels are defined as follows:
Level 1—     Quoted market prices in active markets for identical assets or liabilities
Level 2—     Other observable market-based inputs or unobservable inputs that are corroborated by market data
Level 3—     Significant unobservable inputs
The respective carrying value of certain financial instruments of the Company approximates their fair value. These instruments include cash and cash equivalents, restricted cash and investments, accounts receivable, notes receivable, notes payable and other debt, and accounts payable. Fair values were assumed to approximate carrying values for these financial instruments since they are short-term in nature and their carrying amounts approximate fair values, they are receivable or payable on demand, or the interest rates earned and/or paid approximate current market rates.
Recent Accounting Pronouncements
 
Except for rules and interpretive releases of the SEC under authority of federal securities laws and a limited number of grandfathered standards, the FASB ASC is the sole source of authoritative GAAP literature recognized by the FASB and applicable to the Company. The Company has reviewed the FASB issued ASUs accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods.     
In April 2014, the FASB issued ASU 2014-08 that amends the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. This ASU should be applied prospectively and is effective for the Company for the 2015 annual and interim periods. Early adoption is permitted for disposals that have not been reported in financial statements previously issued. We have not adopted this ASU as of September 30, 2014.
In May 2014, the FASB issued ASU 2014-09 guidance requiring revenue to be recognized in an amount that reflects the consideration expected to be received in exchange for those goods and services. The guidance requires the disclosure of sufficient quantitative and qualitative information for financial statement users to understand the nature, amount, timing and uncertainty of revenue and associated cash flows arising from contracts with customers. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early adoption precluded. The Company has not yet determined the impact, if any, that the adoption of this guidance will have on its consolidated financial position or results of operations.
In August 2014, the FASB issued ASU 2014-15 guidance regarding an entity’s ability to continue as a going concern, which requires management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. Before this new standard, there was minimal guidance in United States GAAP specific to going concern. Under the new standard, disclosures are required when conditions give rise to substantial doubt about a company’s ability to continue as a going concern within one year from the financial statement issuance date. The guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early adoption permitted. The Company has not yet determined the impact, if any, that the adoption of this guidance will have on its consolidated financial statements.

NOTE 2.                           EARNINGS PER SHARE  


10



Basic earnings per share is computed by dividing net income or loss by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is similar to basic earnings per share except net income or loss is adjusted by the impact of the assumed issuance of common shares and the weighted-average number of common shares outstanding and includes potentially dilutive securities, such as options, warrants, non-vested shares, and additional shares issuable under subordinated convertible promissory notes outstanding during the period when such potentially dilutive securities are not anti-dilutive. Potentially dilutive securities from options, warrants and unvested restricted shares are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all options and warrants with exercise prices exceeding the average market value are used to repurchase common stock at market value. The incremental shares remaining after the proceeds are exhausted represent the potentially dilutive effect of the securities. Potentially dilutive securities from subordinated convertible promissory notes are calculated based on the assumed issuance at the beginning of the period, as well as any adjustment to income that would result from their assumed issuance. For the nine months ended September 30, 2014 and 2013 , potentially dilutive securities of 7.8 million and 11.5 million , respectively, were excluded from the diluted loss per share calculation because including them would have been anti-dilutive in both periods.
The following tables provide a reconciliation of net loss for continuing and discontinued operations and the number of common shares used in the computation of both basic and diluted earnings per share:
 
 
Three Months Ended September 30,
 
 
2014
 
2013
(Amounts in 000’s, except per share data)
 
Income
(loss)
 
Shares
 
Per
Share
 
Income
(loss)
 
Shares
 
Per
Share
Continuing Operations:
 
 

 
 

 
 

 
 

 
 

 
 

(Loss) income from continuing operations
 
$
(2,859
)
 
 

 
 

 
$
283

 
 

 
 

Net loss attributable to noncontrolling interests
 
218

 
 

 
 

 
195

 
 

 
 

Basic (loss) income from continuing operations
 
$
(2,641
)
 
18,134

 
$
(0.14
)
 
$
478

 
14,962

 
$
0.03

Preferred stock dividend
 
(646
)
 
18,134

 
$
(0.04
)
 
(306
)
 
14,962

 
$
(0.02
)
Effect of dilutive securities: Stock options, warrants outstanding and convertible debt (a)
 
 

 
 

 
 

 
 

 
 

 
 

Diluted (loss) income from continuing operations
 
$
(3,287
)
 
18,134

 
$
(0.18
)
 
$
172

 
14,962

 
$
0.01

 
 
 
 
 
 
 
 
 
 
 
 
 
Discontinued Operations:
 
 

 
 

 
 

 
 

 
 

 
 

Basic loss from discontinued operations
 
(690
)
 
18,134

 
$
(0.04
)
 
(696
)
 
14,962

 
$
(0.04
)
Diluted loss from discontinued operations
 
(690
)
 
18,134

 
$
(0.04
)
 
(696
)
 
14,962

 
$
(0.04
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Loss Attributable to AdCare:
 
 

 
 

 
 

 
 

 
 

 
 

Basic loss
 
(3,977
)
 
18,134

 
$
(0.22
)
 
(524
)
 
14,962

 
$
(0.03
)
Diluted loss
 
(3,977
)
 
18,134

 
$
(0.22
)
 
(524
)
 
14,962

 
$
(0.03
)

11



 
 
Nine Months Ended September 30,
 
 
2014
 
2013
(Amounts in 000’s, except per share data)
 
Income
(loss)
 
Shares
 
Per
Share
 
Income
(loss)
 
Shares
 
Per
Share
Continuing Operations:
 
 

 
 

 
 

 
 

 
 

 
 

Loss from continuing operations
 
$
(7,336
)
 
 

 
 

 
$
(7,111
)
 
 

 
 

Net loss attributable to noncontrolling interests
 
548

 
 

 
 

 
629

 
 

 
 

Basic loss from continuing operations
 
$
(6,788
)
 
17,539

 
$
(0.39
)
 
$
(6,482
)
 
14,805

 
$
(0.44
)
Preferred stock dividend
 
(1,938
)
 
17,539

 
$
(0.11
)
 
(918
)
 
14,805

 
$
(0.06
)
Effect of dilutive securities: Stock options, warrants outstanding and subordinated convertible promissory notes (a)
 
 

 
 

 
 

 
 

 
 

 
 

Diluted loss from continuing operations
 
$
(8,726
)
 
17,539

 
$
(0.50
)
 
$
(7,400
)
 
14,805

 
$
(0.50
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Discontinued Operations:
 
 

 
 

 
 

 
 

 
 

 
 

Basic loss from discontinued operations
 
(1,531
)
 
17,539

 
$
(0.09
)
 
(2,998
)
 
14,805

 
$
(0.20
)
Diluted loss from discontinued operations
 
(1,531
)
 
17,539

 
$
(0.09
)
 
(2,998
)
 
14,805

 
$
(0.20
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Loss Attributable to AdCare:
 
 

 
 

 
 

 
 

 
 

 
 

Basic loss
 
(10,257
)
 
17,539

 
$
(0.59
)
 
(10,398
)
 
14,805

 
$
(0.70
)
Diluted loss
 
(10,257
)
 
17,539

 
$
(0.59
)
 
(10,398
)
 
14,805

 
$
(0.70
)
(a)  Securities outstanding that were excluded from the computation, prior to the use of the treasury stock method, because they would have been anti-dilutive are as follows:

 
 
September 30,
(Amounts in 000’s)
 
2014
 
2013
Outstanding Stock Options
 
1,144

 
1,357

Outstanding Warrants - employee
 
1,846

 
1,876

Outstanding Warrants - nonemployee
 
816

 
1,904

Subordinated Convertible Promissory Notes (a)
 
4,000

 
6,406

Total anti-dilutive securities
 
7,806

 
11,543

 
(a)  The number of shares of common stock issuable upon conversion of the subordinated convertible promissory notes reflected in the tables above is 120% of the aggregate principal amount of the subordinated convertible promissory notes divided by the current conversion price, which is the number of shares required to be reserved for issuance by the Company under the applicable registration rights agreement.
 
NOTE 3.                           LIQUIDITY AND PROFITABILITY
 
For the nine months ended and as of September 30, 2014 , we had a net loss of $8.9 million and negative working capital of $35.0 million . At September 30, 2014 , we had $12.9 million in cash and cash equivalents and $151.3 million in indebtedness, including current maturities and discontinued operations, of which $56.3 million is current debt (including the Company’s outstanding subordinated convertible promissory notes with a principal amount of $7.5 million and $6.5 million that mature in July 2015 and April 2015 , respectively). Our ability to achieve profitable operations is dependent on continued growth in revenue and controlling costs. 
On July 23, 2014, the Company announced that the Board of Directors had approved, and management has begun to implement, a strategic plan (the "New Plan") to transition the Company to a healthcare property holding and leasing company. On October 14, 2014, the Company held a special meeting of shareholders in Atlanta, Georgia, in which the shareholders approved the additional leasing transactions which transactions may constitute the lease of all or substantially all of the Company's property under Georgia law.
The Company's final assessment of liquidity and profitability under the New Plan is dependent on the timing of the leasing and sub-leasing transactions contemplated by the New Plan. However, the Company believes the New Plan, when fully

12



implemented, will enhance cash flow from operations, reduce capital expenditure requirements, and require significantly less working capital.
We estimate that cash flow from operations and other working capital changes under the existing business model will be approximately $8.0 million and cash outlays for capital expenditures, dividends on our Series A Preferred Stock and income taxes will total approximately $3.1 million for the twelve months ending September 30 , 2015. We anticipate that scheduled debt service (excluding approximately $21.0 million of bullet maturities due in February 2015 that the Company believes will be refinanced on a longer term basis and $6.5 million and $7.5 million in outstanding subordinated convertible promissory notes that mature in April 2015 and July 2015 , respectively, but including principal and interest), will total approximately $16.1 million for the twelve months ending September 30 , 2015. We anticipate the conversion to common stock of $6.5 million and $7.5 million of the Company's outstanding subordinated convertible promissory notes that mature in April 2015 and July 2015, respectively. These promissory notes are convertible into shares of common stock of the Company at $4.50 per share and $4.17 per share, respectively. The closing price of the common stock exceeded $4.17 per share from January 1, 2014 through November 7, 2014 and exceeded $4.50 per share from July 23, 2014 through October 9, 2014. As discussed further below, if we were unable to refinance the $21.0 million of bullet maturities due in February 2015, then the Company may be required to restructure its outstanding indebtedness, implement further cost reduction initiatives, or sell assets due to our limited liquidity in such an event.
During February and March 2014, the Company issued 693,761 shares of common stock to holders of the Company's warrants dated September 30, 2010 upon conversion at an exercise price of $3.57 per share. The Company received proceeds of approximately $2.3 million , net of broker commissions of approximately $0.1 million . On March 28, 2014, we received net proceeds of approximately $6.3 million from the issuance and sale of the Company's 10% subordinated convertible promissory notes due April 30, 2015.
We routinely have ongoing discussions with existing and potential new lenders to refinance current debt on a longer term basis and, in recent periods, have refinanced shorter term acquisition debt, including seller notes, with traditional longer term mortgage notes, some of which have been executed under government guaranteed lending programs. We have been successful in recent years in raising new equity capital and believe, based on recent discussions, that these markets will continue to be available to us for raising capital in 2015.
Based on existing cash balances, anticipated cash flows for the twelve months ending September 30 , 2015, the anticipated refinancing $21.0 million of bullet maturities due February 2015, and the expected conversion of $2.9 million of the Company's outstanding subordinated convertible promissory notes that mature in July 2015 , which excludes subordinated convertible promissory notes with a principal amount in the aggregate of $1.1 million that were converted into shares of common stock of the Company in July and August 2014 (see Note 8 - Notes Payable and Other Debt ), and $6.5 million of subordinated convertible promissory notes due April 2015 , into shares of common stock, we believe there will be sufficient funds for our operations, scheduled debt service, and capital expenditures at least through the next 12 months . On a longer term basis, at September 30 , 2014 we have approximately $36.0 million of debt payments and maturities due between October 2015 and September 2018. We believe our long-term liquidity needs will be satisfied by these same sources, borrowings as required to refinance indebtedness and new sources of equity capital. 
In order to satisfy our capital needs, we will seek to: (i) implement the New Plan and if there are delays in leasing and sub-leasing transactions contemplated by the New Plan, the Company will continue to improve our operating results by increasing facility occupancy, optimizing our payor mix by increasing the proportion of sub-acute patients within our skilled nursing facilities, and continuing our cost optimization and efficiency strategies; (ii) expand our borrowing arrangements with certain existing lenders; (iii) refinance current debt where possible to obtain more favorable terms; and (iv) raise capital through the issuance of debt or equity securities. We anticipate that these actions, if successful, will provide the opportunity for us to maintain liquidity on a short and long term basis, thereby permitting us to meet our operating and financing obligations for the next 12 months. However, there is no guarantee that such actions will be successful or that anticipated operating results will be achieved. We currently have limited borrowing availability under our existing revolving credit facilities. If the Company is unable to improve operating results, expand existing borrowing agreements, refinance current debt (including $21.0 million of bullet maturities due February 2015), the subordinated convertible promissory notes due July 2015 and April 2015 are not converted into shares of common stock and are required to be repaid by us in cash, then the Company may be required to restructure its outstanding indebtedness, implement further cost reduction initiatives, sell assets, or delay or modify its strategic plan.

13



NOTE 4.                           RESTRICTED CASH AND INVESTMENTS
 
The following table sets forth the Company’s various restricted cash, escrow deposits and investments:
 
(Amounts in 000’s)
 
September 30, 2014
 
December 31, 2013
Defeased bonds escrow
 
$
—

 
$
3,138

HUD escrow deposits
 
168

 
91

Property tax escrow
 
19

 
84

Lender's collection account
 
734

 
488

Total current portion
 
921

 
3,801

 
 
 
 
 
HUD replacement reserves
 
1,010

 
383

Repair and remediation/replacement reserves
 
54

 
18

Reserves for capital improvements
 
1,036

 
1,481

Restricted investments for other debt obligations
 
5,673

 
9,724

Total noncurrent portion
 
7,773

 
11,606

 
 
 
 
 
Total restricted cash and investments
 
$
8,694

 
$
15,407

 
 
NOTE 5.                           PROPERTY AND EQUIPMENT
 
The following table sets forth the Company’s property and equipment:
 
(Amounts in 000’s)
 
Estimated Useful
Lives (Years)
 
September 30, 2014
 
December 31, 2013
Buildings and improvements
 
5-40
 
$
132,856

 
$
131,123

Equipment
 
2-10
 
13,849

 
11,987

Land
 
—
 
6,808

 
6,788

Computer related
 
2-10
 
2,952

 
2,980

Construction in process
 
—
 
108

 
270

 
 
 
 
156,573

 
153,148

Less: accumulated depreciation and amortization expense
 
 
 
20,001

 
14,915

Property and equipment, net
 
 
 
$
136,572

 
$
138,233

 
Depreciation and amortization expense was approximately $1.9 million and $5.7 million for the three and nine months ended September 30, 2014 , respectively, and $1.8 million and $5.2 million for the three and nine months ended September 30, 2013 , respectively. Total depreciation and amortization expense excludes $0.1 million and $0.2 million for the three and nine months ended September 30, 2014 , respectively, and $0.1 million and $0.3 million for the three and nine months ended September 30, 2013 , respectively, that is recognized in loss from discontinued operations, net of tax.
During December 2013, the Company recognized a $0.5 million impairment charge to write down the carrying value of certain lease rights, equipment, and leasehold improvement values of a facility located in Thomasville, Georgia. The impairment charge represents a change in fair value from the carrying value.
During the three and nine months ended September 30, 2014 , the Company recorded an impairment of $0.05 million and $0.2 million , respectively, related to an adjustment to the fair value less the cost to sell the 102 -bed nursing facility located in Tulsa, Oklahoma, known as Companions Specialized Care Center ("Companions"). We compared the estimated fair value of the assets to their carrying value and recorded an impairment charge for the excess of carrying value over estimated fair value. The assets and liabilities of Companions are included in Assets and Liabilities Held for Sale as of September 30, 2014 (see Note 10 - Discontinued Operations ).

14



NOTE 6.                           INTANGIBLE ASSETS AND GOODWILL
    
There have been no impairment adjustments to intangible assets and goodwill during the three and nine months ended September 30, 2014 . Intangible assets consist of the following: 
(Amounts in 000’s)
 
Bed Licenses (included in property and equipment)
 
Bed Licenses - Separable
 
Lease Rights
 
Total
Balances, December 31, 2013
 
 

 
 

 
 

 
 

Gross
 
$
38,407

 
$
2,471

 
$
7,407

 
$
48,285

Accumulated amortization
 
(2,620
)
 
—

 
(2,518
)
 
(5,138
)
Net carrying amount
 
$
35,787

 
$
2,471

 
$
4,889

 
$
43,147

 
 
 
 
 
 
 
 
 
Reclass to held for sale
 
(1,530
)
 
—

 
—

 
(1,530
)
Accumulated amortization reclass to held for sale
 
68

 
—

 
—

 
68

Amortization expense
 
(924
)
 
—

 
(635
)
 
(1,559
)
 
 
 
 
 
 
 
 
 
Balances, September 30, 2014
 
 
 
 
 
 
 
 
Gross
 
36,877

 
2,471

 
7,407

 
46,755

 
 
—

 
—

 
—

 
—

Accumulated amortization
 
(3,476
)
 
—

 
(3,153
)
 
(6,629
)
Net carrying amount
 
$
33,401

 
$
2,471

 
$
4,254

 
$
40,126

 
Amortization expense for bed licenses included in property and equipment was approximately $0.3 million and $0.9 million for the three and nine months ended September 30, 2014 , respectively, and $0.3 million and $0.9 million for the three and nine months ended 2013 . Amortization expense for lease rights was approximately $0.2 million and $0.6 million for the three and nine months ended September 30, 2014 , respectively, and $0.2 million and $0.7 million for the three and nine months ended September 30, 2013 .
Expected amortization expense for all definite lived intangibles for each of the years ended December 31 is as follows: 
(Amounts in 000’s)
 
Bed Licenses
 
Lease Rights
2014 (a)
 
$
308

 
$
166

2015
 
1,232

 
667

2016
 
1,232

 
667

2017
 
1,232

 
667

2018
 
1,232

 
667

Thereafter
 
28,165

 
1,420

Total expected amortization expense
 
$
33,401

 
$
4,254

 
(a)  Estimated amortization expense for the year ending December 31, 2014 includes only amortization to be recorded after September 30, 2014 .

The following table summarizes the carrying amount of goodwill at September 30, 2014 compared to December 31, 2013 :
(Amounts in 000’s)
 
September 30, 2014
 
December 31, 2013
Beginning balances
 
$
5,023

 
$
5,023

Accumulated impairment losses
 
(799
)
 
(799
)
Ending balances
 
$
4,224

 
$
4,224

 
The Company does not amortize goodwill or indefinite lived intangibles, which consist of separable bed licenses.
 

15



NOTE 7.                           ACCRUED EXPENSES
 
Accrued expenses consist of the following:
 
(Amounts in 000’s)
 
September 30, 2014
 
December 31, 2013
Accrued payroll related
 
$
7,359

 
$
5,204

Accrued employee benefits
 
3,861

 
3,712

Real estate and other taxes
 
1,373

 
1,543

Other accrued expenses
 
3,051

 
2,805

Total accrued expenses
 
$
15,644

 
$
13,264


NOTE 8.                               NOTES PAYABLE AND OTHER DEBT
 
Notes payable and other debt consist of the following:
 
(Amounts in 000’s)
 
September 30, 2014
 
December 31, 2013
Revolving credit facilities and lines of credit (a)
 
$
8,213

 
$
8,503

Senior debt - guaranteed by HUD
 
18,469

 
4,063

Senior debt - guaranteed by USDA
 
27,296

 
27,763

Senior debt - guaranteed by SBA
 
5,774

 
5,954

Senior debt - bonds, net of discount (b)
 
12,961

 
16,102

Senior debt - other mortgage indebtedness (c)
 
63,390

 
78,408

Other debt
 
1,151

 
625

Convertible debt issued in 2010, net of discount
 
—

 
6,930

Convertible debt issued in 2011
 
—

 
4,459

Convertible debt issued in 2012
 
7,500

 
7,500

Convertible debt issued in 2014
 
6,500

 
—

Total
 
$
151,254

 
$
160,307

Less: current portion
 
45,143

 
26,154

Less: portion included in liabilities of disposal group held for sale (a),(c)
 
5,197

 
—

Less: portion included in liabilities of variable interest entity held for sale (b)
 
5,954

 
6,034

Notes payable and other debt, net of current portion
 
$
94,960

 
$
128,119


(a)  The revolving credit facilities and lines of credit includes $0.2 million related to the outstanding loan entered into in conjunction with the acquisition of the Companions skilled nursing facility in August 2012.
(b)  The senior debt - bonds, net of discount includes $6.0 million at both September 30, 2014 and December 31, 2013 related to the Company's consolidated variable interest entity, Riverchase Village ADK, LLC, revenue bonds, in two series, issued by the Medical Clinical Board of the City of Hoover in the State of Alabama, which the Company has guaranteed the obligation under such bonds.
(c)  The senior debt - other mortgage indebtedness includes $5.0 million related to the outstanding loan entered into in conjunction with the acquisition of Companions in August 2012.


16



Scheduled Maturities

The schedule below summarizes the scheduled maturities as of September 30, 2014 for each of the next five years and thereafter. The 2015 maturities include $0.2 million and $5.0 million , respectively, related to the Companions outstanding loans classified as liabilities of disposal group held for sale and $6.0 million related to the Riverchase bonds classified as liabilities of a variable interest entity held for sale at September 30, 2014 .
 
(Amounts in 000’s)
2015
$
56,470

2016
17,865

2017
14,262

2018
3,920

2019
1,989

Thereafter
57,147

Subtotal
151,653

Less: unamortized discounts ($190 classified as current)
(399
)
   Total notes and other debt
$
151,254

 
Debt Covenant Compliance
 
As of September 30, 2014 , the Company (including its consolidated variable interest entity) has approximately 37 credit related instruments (credit facilities, mortgage notes, bonds and other credit obligations) outstanding that include various financial and administrative covenant requirements. Covenant requirements include, but are not limited to, fixed charge coverage ratios, debt service coverage ratios, minimum EBITDA or EBITDAR, current ratios and tangible net worth requirements. Certain financial covenant requirements are based on consolidated financial measurements whereas others are based on measurements at the subsidiary level (i.e., facility, multiple facilities or a combination of subsidiaries comprising less than the Company’s consolidated financial measurements). Some covenants are based on annual financial metric measurements whereas others are based on quarterly financial metric measurements. The Company routinely tracks and monitors its compliance with its covenant requirements. In recent periods, including as of September 30, 2014 , the Company has not been in compliance with certain financial and administrative covenants. For each instance of such non-compliance, the Company has obtained waivers or amendments to such requirements, including as necessary modifications to future covenant requirements or the elimination of certain requirements in future periods.
Revolving Credit Facilities and Lines of Credit

Gemino-Northwest Credit Facility
 
On May 30, 2013, NW 61st Nursing, LLC (“Northwest”), a wholly-owned subsidiary of the Company, entered into a Credit Agreement (the “Northwest Credit Facility”) with Gemino Healthcare Finance, LLC ("Gemino").
On February 10, 2014, Northwest entered into a letter agreement with Gemino which modified the: (i) Northwest Credit Facility; and (ii) Gemino-Bonterra Credit Facility (described below). The Waiver and Amendment, among other things, adjusted the required: (a) minimum fixed charge coverage ratio; (b) maximum loan turn days; (c) minimum earnings before interest, taxes, depreciation and amortization; and (d) waived certain specified defaults in existence as of the date of the Waiver and Amendment.
As of September 30, 2014 , $1.5 million was outstanding of the maximum borrowing amount of $1.5 million under the Northwest Credit Facility.
Gemino-Bonterra Credit Facility

On September 20, 2012, ADK Bonterra/Parkview, LLC ("Bonterra"), a wholly owned subsidiary of the Company, entered into a Second Amendment to the Credit Agreement with Gemino ("Gemino-Bonterra Credit Facility"), which amended the original Credit Agreement dated April 27, 2011 between Bonterra and Gemino.
On February 10, 2014, Bonterra entered into a letter agreement with Gemino which modified the: (i) Northwest Credit Facility (described above); and (ii) Gemino-Bonterra Credit Facility. The Waiver and Amendment, among other things, adjusted

17



the required: (a) minimum fixed charge coverage ratio; (b) maximum loan turn days; (c) minimum earnings before interest, taxes, depreciation and amortization; and (d) waived certain specified defaults in existence as of the date of the Waiver and Amendment.
As of September 30, 2014 , $1.3 million was outstanding of the maximum borrowing amount of $2.0 million under the Gemino-Bonterra Credit Facility.
PrivateBank Credit Facility

On July 24, 2014, certain wholly-owned subsidiaries of the Company entered into a Fifth Modification Agreement with the PrivateBank and Trust Company ("PrivateBank"), effective July 22, 2014, which modified that certain Loan Agreement, dated September 20, 2012, as amended, the PrivateBank Credit Facility. The modification, among other things: (i) increased the letter of credit amount available under the PrivateBank Credit Facility from $3.5 million to $3.8 million ; and (ii) amended certain financial terms under the PrivateBank Credit Facility regarding debt service and interest charges.
On September 24, 2014, certain wholly-owned subsidiaries of the Company entered into a Sixth Modification Agreement with PrivateBank, which modified that certain Loan Agreement, dated September 20, 2012, as amended, the PrivateBank Credit Facility. Pursuant to the modification: (i) the outstanding amount owing under the PrivateBank Credit Facility was reduced from $10.6 million to $9.1 million ; (ii) three of the Company's subsidiaries and their collateral were released from their obligations under the PrivateBank Credit Facility because one of the entities no longer operates a skilled nursing facility and each of the two remaining released entities have entered into new financing arrangements with the United States Department of Housing and Urban Development ("HUD"), as discussed below; and (iii) amends certain financial terms under the PrivateBank Credit Facility regarding minimum fixed charge coverage ratio.

As of September 30, 2014 , $4.1 million was outstanding of the maximum borrowing amount of $9.1 million under the
PrivateBank Credit Facility, subject to borrowing base limitations. As of September 30, 2014 , the Company has $3.8 million of
outstanding letters of credit relating to this credit facility.

PrivateBank-Woodland Nursing and Glenvue Nursing Credit Facility

On September 24, 2014, certain wholly-owned subsidiaries of the Company entered into a Loan and Security Agreement (the “Woodland Nursing and Glenvue Nursing Credit Facility”) with PrivateBank. The Woodland Nursing and Glenvue Nursing Credit Facility provides for a $1.5 million principal amount senior secured revolving credit facility.

The Woodland Nursing and Glenvue Nursing Credit Facility matures on September 24, 2017. Interest on the Woodland Nursing and Glenvue Nursing Credit Facility accrues on the principal balance thereof at a rate of interest equal to the greater of: (i) a floating per annum rate of interest equal to the prime rate plus 1.0% ; or (ii) 5.0% per annum. The Woodland Nursing and Glenvue Nursing shall also pay to PrivateBank: (i) a one time non-refundable loan fee in the amount of $ 11,250 and (ii) a fee equal to 0.5% per annum of the unused portion of the Woodland Nursing and Glenvue Nursing Credit Facility. The Woodland Nursing and Glenvue Nursing Credit Facility is secured by a security interest in, without limitation, the accounts receivable and the collections and proceeds thereof relating to the Company’s two skilled nursing facilities located in Springfield, Ohio known as the Eaglewood Care Center and located in Glennville, Georgia known as the Glenview Health and Rehabilitation Center. The Company has unconditionally guaranteed all amounts owing under the Woodland Nursing and Glenvue Nursing Credit Facility.

The Woodland Nursing and Glenvue Nursing Credit Facility contains customary events of default, including material breach of representations and warranties, failure to make required payments, failure to comply with certain agreements or covenants and certain events of bankruptcy and insolvency. Upon the occurrence of an event of default, PrivateBank may terminate the Woodland Nursing and Glenvue Nursing Credit Facility.

As of September 30, 2014 , $1.1 million was outstanding of the maximum borrowing amount of $1.5 million under the
Woodland Nursing and Glenvue Nursing Credit Facility, subject to borrowing base limitations.

Senior Debt—Guaranteed by HUD
Woodland Credit Facility
On September 24, 2014, a wholly owned subsidiary of the Company, entered into a Mortgage and Deed of Trust Agreement (the “Woodland Credit Facility”), with Housing & Healthcare Finance, LLC (“H&H”) in connection with the refinancing of the skilled nursing facility known as Eaglewood Care Center ("Eaglewood"). The Woodland Credit Facility provides for a $5.7 million principal amount secured credit facility.

18



The proceeds from the Woodland Credit Facility were used to pay off an existing credit facility with PrivateBank with respect to the Eaglewood facility in the amount of $4.5 million and the Company received net proceeds of $0.6 million for working capital purposes.
The Woodland Credit Facility matures on October 1, 2044. Interest on the Woodland Credit Facility accrues on the principal balance thereof at an annual rate of 3.75% . The Woodland Credit Facility is secured by, among other things, an assignment of all rents paid under any existing or future leases and rental agreements with respect to the Woodland Credit Facility. HUD has insured all amounts owing under the Woodland Credit Facility. The Woodland Credit Facility contains customary events of default, including fraud or material misrepresentations or material omission, the commencement of a forfeiture action or proceeding, failure to make required payments, failure to perform or comply with certain agreements and certain events of bankruptcy and insolvency. Upon the occurrence of certain events of default, H&H may, after receiving the prior written approval of HUD, terminate the Woodland Credit Facility and all amounts under the Woodland Credit Facility will become immediately due and payable.
In connection with entering into the Woodland Credit Facility, Woodland entered into a healthcare regulatory agreement and a promissory note, each containing customary terms and conditions.
Glenvue Credit Facility
On September 24, 2014, a wholly owned subsidiary of the Company, entered into a Mortgage and Deed of Trust Agreement (the “Glenvue Credit Facility”), with H&H in connection with the refinancing of the skilled nursing facility known as Glenvue Health and Rehabilitation ("Glenvue"). The Glenvue Credit Facility provides for an $8.8 million principal amount secured credit facility.
The proceeds from the Glenvue Credit Facility were used to pay off an existing credit facility with PrivateBank with respect to the Glenvue facility in the amount of $6.4 million and the Company received net proceeds of $1.8 million for working capital purposes.
The Glenvue Credit Facility matures on October 1, 2044. Interest on the Glenvue Credit Facility accrues on the principal balance thereof at an annual rate of 3.75% . The Glenvue Credit Facility is secured by, among other things, an assignment of all rents paid under any existing or future leases and rental agreements with respect to the Glenvue Credit Facility. HUD has insured all amounts owing under the Glenvue Credit Facility.
The Glenvue Credit Facility contains customary events of default, including fraud or material misrepresentations or material omission, the commencement of a forfeiture action or proceeding, failure to make required payments, failure to perform or comply with certain agreements and certain events of bankruptcy and insolvency. Upon the occurrence of certain events of default, H&H may, after receiving the prior written approval of HUD, terminate the Glenvue Credit Facility and all amounts under the Glenvue Credit Facility will become immediately due and payable.

In connection with entering into the Glenvue Credit Facility, Glenvue entered into a healthcare regulatory agreement and a promissory note, each containing customary terms and conditions.
Senior Debt—Bonds, net of Discount

Quail Creek

In July 2012, a wholly owned subsidiary of AdCare financed the purchase of a skilled nursing facility located in Oklahoma City, Oklahoma known as Quail Creek Nursing & Rehabilitation Center by the assumption of existing indebtedness under that certain Loan Agreement and Indenture of First Mortgage with The Bank of New York Mellon Global Corporate Trust, as assignee of The Liberty National Bank and Trust of that certain Bond Indenture, dated September 1, 1986, as amended as of September 1, 2001. The indebtedness under the Loan Agreement and Indenture consisted of a principal amount of $2.8 million . In July of 2012, the purchase price allocation of fair value totaling $3.2 million was assigned to this indebtedness resulting in a $0.4 million premium that was amortized to maturity. The loan was scheduled to mature in August 2016 and accrued interest at a fixed rate of 10.25% per annum. The loan was secured by the Quail Creek Nursing & Rehabilitation Center. On September 27, 2013, the outstanding principal and accrued interest to the prepayment date in the amount of $3.1 million was deposited into a restricted defeased bonds escrow account.
Pursuant to the loan agreement and indenture, the outstanding bonds were prepaid on March 3, 2014 at par plus accrued interest in the amount of $3.1 million from the funds that were previously deposited into a restricted defeased bonds escrow account.

19



Senior Debt - Other Mortgage Indebtedness

Northridge, Woodland Hills and Abington

On March 28, 2014, the Company entered into a Fourth Amendment to the Secured Loan Agreement and Payment Guaranty with KeyBank National Association ("KeyBank"), which amended the Secured Loan Agreement between the Company and KeyBank (the "KeyBank Credit Facility"). Pursuant to the amendment, among other things: (i) KeyBank waived the failure of certain financial covenants of such subsidiaries regarding fixed charge coverage ratio, implied debt service coverage, and compliance of making a certain sinking fund payment due on March 1, 2014 such that no default or events of default under the KeyBank Credit Facility occurred due to such failure; (ii) modified and amended certain financial covenants regarding the Company’s fixed charge ratio and implied debt service coverage; and (iii) paid down $3.4 million of loan principal from the release of $3.4 million from a certain collateral account.
As of September 30, 2014 , $12.0 million was outstanding under the KeyBank Credit Facility. The Company has $2.0 million of restricted assets related to this loan.
Glenvue
On July 17, 2014, a certain wholly-owned subsidiary of the Company entered into a Modification Agreement with PrivateBank, effective July 2, 2014, which modified that certain Loan Agreement, dated July 2, 2012, as amended, the PrivateBank Loan Agreement. The modification, among other things: (i) extended the maturity date of the PrivateBank Loan Agreement from July 2, 2014 to January 2, 2015; and (ii) amended certain financial terms under the PrivateBank Loan Agreement regarding debt service and interest charges.
On September 24, 2014, the PrivateBank Loan Agreement in the outstanding principal amount of $6.4 million was repaid by the proceeds from the Glenvue Credit Facility, noted above, and the Company received net proceeds of $1.8 million for working capital purposes.
Woodland Manor
On September 24, 2014, that certain Loan Agreement, dated December 30, 2011, with PrivateBank in the outstanding principal amount of $4.5 million was repaid by the proceeds from the Woodland Credit Facility, noted above, and the Company received net proceeds of $0.6 million for working capital purposes.
Convertible Debt
Subordinated Convertible Promissory Notes Issued in 2010   (the "2010 Notes")

20



During the nine months ended September 30, 2014 , holders of the Company's subordinated convertible promissory notes due August 2014 converted approximately $6.9 million of principal and accrued and unpaid interest outstanding under such notes into shares of common stock at a price of $3.73 per share. The Company recognized a $1.8 million loss on extinguishment of debt during the nine months ended September 30, 2014 related to the difference between the conversion price and the market price on the date the subordinated convertible promissory notes were converted into shares of common stock. The schedule below summarizes the note conversions and number of shares of common stock issued for each conversion since inception:
Date of conversion
 
 Conversion Price
 
Shares of Common Stock Issued
 
Debt and Interest Converted
2011:
 
 
 
 
 
 
July
 
$
4.13

 
18,160

 
$
75,000

November
 
$
3.92

 
19,132

 
75,000

Subtotal
 
 
 
37,292

 
$
150,000

2013:
 
 
 
 
 
 
February
 
$
3.73

 
6,635

 
$
24,749

March
 
$
3.73

 
6,635

 
24,749

April
 
$
3.73

 
67,024

 
250,000

August
 
$
3.73

 
284,878

 
1,062,595

September
 
$
3.73

 
246,264

 
918,553

October
 
$
3.73

 
448,215

 
1,671,840

November
 
$
3.73

 
136,402

 
508,778

December
 
$
3.73

 
82,326

 
307,067

Subtotal
 
 
 
1,278,379

 
$
4,768,331

2014:
 
 
 
 
 
 
January
 
$
3.73

 
788,828

 
$
2,942,328

July
 
$
3.73

 
26,810

 
100,000

August
 
$
3.73

 
1,045,575

 
3,900,000

Subtotal
 
 
 
1,861,213

 
$
6,942,328

   Total
 
 
 
3,176,884

 
$
11,860,659


Subordinated Convertible Promissory Notes Issued in 2011 (the "2011 Notes")  
    
On March 28, 2014, certain holders of the 2011 Notes with an aggregate principal amount of $0.4 million surrendered and cancelled such 2011 Notes in payment for 2014 Notes (as discussed and defined below) with an equal principal amount. On March 31, 2014, the Company repaid the remaining outstanding principal amount of $4.0 million for the 2011 Notes plus all interest accrued and unpaid under the 2011 Notes (including those 2011 Notes surrendered and cancelled in payment for 2014 Notes).
Subordinated Convertible Promissory Notes Issued in 2014   (the "2014 Notes")

The Company entered into Subscription Agreements with certain accredited investors pursuant to which the Company issued and sold, on March 28, 2014, an aggregate of $6.5 million in principal amount of the 2014 Notes. The 2014 Notes bear interest at 10.0% per annum and such interest is payable quarterly in cash in arrears beginning on June 30, 2014. The 2014 Notes mature on April 30, 2015. The 2014 Notes are unsecured and subordinated in right of payment to existing and future senior indebtedness of the Company.
At any time on or after the date of issuance of the 2014 Notes, the 2014 Notes are convertible at the option of the holder into shares of the common stock at an initial conversion price equal to $4.50 per share, subject to adjustment for stock dividends, stock splits, combination of shares, recapitalization and other similar events.
The Company may prepay at any time, without penalty, upon 60 days prior notice, any portion of the outstanding principal amount and accrued and unpaid interest thereon with respect to any 2014 Note; provided, however, that: (i) the shares of common

21



stock issuable upon conversion of any 2014 Note which is to be so prepaid must be: (a) registered for resale under the Securities Act; or (b) otherwise sellable under Rule 144 of the Securities Act without volume limitations thereunder; and (ii) at any time after the issue date of the 2014 Notes, the volume-weighted average price of the common stock for ten consecutive trading days has equaled or exceeded 105% of the then-current conversion price.
In addition, the holders holding a majority of the outstanding principal amount with respect to all the 2014 Notes may require the Company to redeem all or any portion of the 2014 Notes upon a change of control at a redemption price equal to the outstanding principal amount to be redeemed plus all accrued and unpaid interest thereon. Furthermore, upon a change of control, the Company may redeem all or any portion of the 2014 Notes for a redemption price equal to the outstanding principal amount to be redeemed plus all accrued and unpaid interest thereon.
Park City Capital Offshore Master, Ltd. (“Park City Offshore”), an affiliate of Michael J. Fox, entered into a Subscription Agreement with the Company pursuant to which the Company issued $1.0 million in principal amount of the 2014 Notes. Mr. Fox is a director of Park City Offshore and a director of the Company and beneficial owner of greater than 5% of the outstanding common stock. The 2014 Note was offered to and sold to Park City Offshore on the same terms and conditions as all other buyers in the offering.
Other Debt
 
In March 2014, the Company obtained financing from AON Premium Finance, LLC and entered into Commercial Insurance Premium Finance Security Agreements for several insurance programs, including general and professional liability, property, casualty, crime, and employment practices liability effective January 1, 2014 and maturing on December 31, 2014. The total amount financed was approximately $3.3 million requiring monthly payments of $0.3 million with interest ranging from 2.87% to 4.79% . At September 30, 2014 , the outstanding amount was approximately $1.2 million . 
NOTE 9.                     ACQUISITIONS
 
On February 15, 2013, the Company entered into a Purchase and Sale Agreement with Avalon Health Care, LLC (“Avalon”) to acquire certain land, buildings, improvements, furniture, vehicles, contracts, fixtures and equipment comprising: (i) a 180 -bed skilled nursing facility known as Bethany Health and Rehab; and (ii) a 240 -bed skilled nursing facility known as Trevecca Health and Rehab, both located in Nashville, Tennessee. The Company deposited $0.4 million of earnest money escrow deposits in February 2013. On June 1, 2013, the Purchase and Sale Agreement was terminated due to the failure of the transaction to close by May 31, 2013. In connection with the termination of the Purchase and Sale Agreement, the Company was seeking the return of $0.4 million previously deposited earnest money escrow deposits. On August 1, 2013, the Company entered into a settlement agreement regarding the return of the $0.4 million previously deposited earnest money escrow deposits. Pursuant to the agreement, the previously deposited earnest money escrow deposits were released and distributed, $0.3 million to the Company and $0.1 million to Avalon, respectively.
The Company incurred acquisition costs of approximately $0.03 million and $0.6 million during the three and nine months ended September 30, 2013 , respectively. Acquisition costs are recorded in the “Other Income (Expense)” section of the Consolidated Statements of  Operations. There were no acquisition costs during the three and nine months ended September 30, 2014 .
NOTE 10.                        DISCONTINUED OPERATIONS

In the fourth quarter of 2012, the Company entered into an agreement to sell six assisted living facilities located in Ohio. The Company also entered into a sublease arrangement in the fourth quarter of 2012 to exit the operations of a skilled nursing facility in Jeffersonville, Georgia.
On February 28, 2013, the Company completed the sale of the facility known as Lincoln Lodge Retirement Residence and used the proceeds to pay the principal balance of the HUD mortgage note with respect to the facility of $1.9 million . The Company recognized a gain on the sale of approximately $0.1 million and cash proceeds, net of costs and debt payoff, of $0.6 million .    
On May 6, 2013, Hearth & Home of Vandalia, Inc. (the “Vandalia Seller”), a wholly owned subsidiary of the Company, sold to H & H of Vandalia, LLC (the “Vandalia Purchaser”), pursuant to that certain Agreement of Sale, dated October 11, 2012 and amended December 28, 2012 (as amended, the “Ohio Sale Agreement”), between the Company and certain of its subsidiaries, including the Vandalia Seller (together, the “Ohio ALF Sellers”), on the one hand, and CHP Acquisition Company, LLC (“CHP”) on the other hand, certain land, buildings, improvements, furniture, fixtures and

22



equipment comprising the Vandalia facility located in Vandalia, Ohio. CHP had previously assigned its rights in the Ohio Sale Agreement with respect to the Vandalia facility to the Vandalia Purchaser.
The sale price for the Vandalia facility consisted of, among other items: (i) an assumption, by the Vandalia Purchaser, of a mortgage in an aggregate amount of $3.6 million (the “Vandalia Mortgage”) that secures the Vandalia facility; and (ii) a release of the Vandalia Seller from its obligations to Red Mortgage Capital, LLC (the “Vandalia Mortgagee”) and HUD with respect to the Vandalia Mortgage, pursuant to a release and assumption agreement entered into among the Vandalia Purchaser, the Vandalia Seller, HUD and the Vandalia Mortgagee. In connection with the sale of the Vandalia facility, the Vandalia Seller and Vandalia Purchaser also entered into an assignment and assumption agreement of trust funds and service contracts, containing customary terms and conditions.
In June 2013, the Company entered into a Release Agreement with CHP amending the terms of the $3.6 million Seller Note issued in the connection with the sale of four of the six Ohio assisted living facilities sold to CHP in the fourth quarter of 2012. In exchange for a reduction in the Vandalia purchase price by $0.4 million , CHP agreed to immediately payoff the Seller Note resulting in a net payment of $3.2 million . Proceeds from the $3.2 million payment were used to fund a $2.0 million increase in collateralized restricted cash required by one of the Company’s lenders and $1.2 million was received by the Company for working capital purposes. The Company recognized a loss on the sale of Vandalia of $0.4 million .
 On June 11, 2013, the Company completed the sale of its former Springfield, Ohio corporate office building which was sold for the approximate net book value. The Company used the proceeds to pay off the principal balance of the mortgage note with respect to the building of approximately $0.1 million .
On June 12, 2013, the Company executed two sublease agreements to exit the skilled nursing business in Tybee Island, Georgia, effective June 30, 2013, relating to two facilities. During the fourth quarter of 2013, Riverchase, our variable interest entity, entered into a sales listing agreement to sell Riverchase Village, the 105 -unit assisted living facility located in Hoover, Alabama, to exit the operations. Riverchase subsequently entered into a purchase sale agreement on April 1, 2014 to sell Riverchase Village but the purchase sale agreement was terminated on August 6, 2014.
During the first quarter of 2014, the Company executed a representation agreement to sell Companions, a 102 -bed skilled nursing facility located in Tulsa, Oklahoma, to exit the operations. On July 1, 2014, the Company entered into an agreement effective July 1, 2014 to sublease a 52-bed skilled nursing facility located in Thomasville, Georgia to a local nursing home operator.
The results of operations and cash flows for the home health business, the six Ohio assisted living facilities, the Jeffersonville, Georgia skilled nursing facility, the two facilities in Tybee Island, Georgia, the assisted living facility in Hoover, Alabama, the skilled nursing facility in Tulsa, Oklahoma, and the skilled nursing facility in Thomasville, Georgia are reported as discontinued operations in 2014 and 2013.
The following table summarizes the activity of discontinued operations for the three and nine months ended September 30, 2014 and 2013 :
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in 000’s)
 
2014
 
2013
 
2014
 
2013
Total revenues from discontinued operations
 
$
1,400

 
$
2,230

 
$
5,789

 
$
10,469

Net loss from discontinued operations
 
$
(690
)
 
$
(696
)
 
$
(1,531
)
 
$
(2,998
)
Interest expense, net from discontinued operations
 
$
263

 
$
258

 
$
787

 
$
864

Loss on disposal of assets from discontinued operations
 
$
—

 
$
(20
)
 
$
—

 
$
(467
)

Assets and liabilities of the disposal groups held for sale at September 30, 2014 and December 31, 2013 are as follows: 

23



(Amounts in 000’s)
 
September 30, 2014
 
December 31, 2013
Property and equipment, net
 
$
5,418

 
$
400

Other assets
 
1,627

 
—

Assets of disposal groups held for sale
 
$
7,045

 
$
400

 
 
 
 
 
Mortgage payable
 
$
5,000

 
$
—

Line of credit
 
197

 
—

Liabilities of disposal group held for sale
 
$
5,197

 
$
—

 
Certain assets of Companions have been reclassifed to Assets of disposal group held for use at December 31, 2013 , and are shown in the table below. Certain assets of Companions as of September 30, 2014 are included in the Assets of disposal group held for sale in the table above.
Amounts in (000's)
 
December 31, 2013
Property and equipment, net
 
$
5,135

Assets of disposal group held for use
 
$
5,135

Assets and liabilities of the variable interest entity held for sale at September 30, 2014 and December 31, 2013 are as follows:
Amounts in (000's)
 
September 30, 2014
 
December 31, 2013
Property and equipment, net
 
$
5,893

 
$
5,893

Other assets
 
$
1

 
$
52

Assets of variable interest entity held for sale
 
$
5,894

 
$
5,945

 
 
 
 
 
Bonds payable
 
$
5,954

 
$
6,034

Liabilities of variable interest entity held for sale
 
$
5,954

 
$
6,034


NOTE 11.                        PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
 
Preferred Stock Offerings

On October 28, 2013, the Company sold 500,000 shares of its Series A Preferred Stock at $25 per share in a registered public offering. The Company received proceeds from the offering of $11.3 million after deducting underwriting discounts and other offering-related expenses of $1.2 million . The liquidation preference of the Series A Preferred Stock is $25 per share. Cumulative dividends accrue and are paid in the amount of $2.72 per share each year, which is equivalent to 10.875% of the $25 liquidation preference per share. The dividend rate may increase under certain circumstances.
On November 7, 2012, the Company sold 450,000 shares of its Series A Preferred Stock offered at $23 per share in a registered public offering. The Company received proceeds from the offering of $9.2 million after deducting underwriting discounts and other offering-related expenses of $1.2 million . The liquidation preference of the Series A Preferred Stock is $25 per share. Cumulative dividends accrue and are paid in the amount of $2.72 per share each year, which is equivalent to 10.875% of the $25 liquidation preference per share. The dividend rate may increase under certain circumstances.
Holders of the Series A Preferred Stock generally have no voting rights but have limited voting rights under certain circumstances. The Company may not redeem the Series A Preferred Stock before December 1, 2017, except the Company is required to redeem the Series A Preferred Stock following a "Change of Control," as defined in the Company's Articles of Incorporation. On and after December 1, 2017, the Company may, at its option, redeem the Series A Preferred Stock, in whole or in part, by paying $25 per share, plus any accrued and unpaid dividends to the redemption date. 

24



The change-in-control provision requires the Series A Preferred Stock to be classified as temporary equity because, although deemed a remote possibility, a purchaser could acquire a majority of the voting power of the outstanding common stock without company approval, thereby triggering redemption. FASB ASC Topic 480-10-S99-3A, SEC Staff Announcement: Classification and Measurement of Redeemable Securities, requires classification outside of permanent equity for redeemable instruments for which the redemption triggers are outside of the issuer’s control. The assessment of whether the redemption of an equity security could occur outside of the issuer’s control is required to be made without regard to the probability of the event or events that may result in the instrument becoming redeemable. 
NOTE 12.                        STOCK BASED COMPENSATION
 
For the three and nine months ended September 30, 2014 and 2013 , the Company recognized stock-based compensation as follows: 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in 000’s)
 
2014
 
2013
 
2014
 
2013
Employee compensation:
 
 

 
 

 
 

 
 

Stock options
 
$
88

 
$
55

 
$
277

 
$
343

Employee warrants
 
43

 
31

 
133

 
90

Management restricted stock
 
10

 
2

 
112

 
19

Total employee stock-based compensation expense
 
$
141

 
$
88

 
$
522

 
$
452

Non-employee compensation
 
 
 
 
 
 
 
 
Board restricted stock
 
$
42

 
$
67

 
$
268

 
$
201

Board stock options
 
61

 
26

 
182

 
79

Subtotal non-employee stock-based compensation expense
 
$
103

 
$
93

 
$
450

 
$
280

Amortization of prepaid services
 
—

 
5

 
11

 
5

Total non-employee stock-based compensation expense
 
$
103

 
$
98

 
$
461

 
$
285

Total stock-based compensation expense
$
244

 
$
186

 
$
983

 
$
737


Stock Incentive Plans
 
The Company has three equity-based compensation plans: the AdCare Health Systems, Inc. 2011 Stock Incentive Plan (the “2011 Plan”), the 2005 Stock Option Plan of AdCare Health Systems, Inc. (the “2005 Plan”) and the 2004 Stock Option Plan of AdCare Health Systems, Inc. (the “2004 Plan”) which provide for the granting of qualified incentive and non-qualified stock options to employees, directors, consultants and advisors. The 2011 Plan also permits the granting of restricted stock to employees, directors, consultants and advisors. The awards are subject to a vesting schedule as set forth in each individual agreement. The Company intends to use only the 2011 Plan to make future grants. The 2004 Plan expired on March 31, 2014. The number of options under the 2005 Plan outstanding at September 30, 2014 was 16,014 . The maximum number of shares of common stock which can be issued under the 2011 Plan is 2,152,500 at September 30, 2014 . 
The fair value of options and warrants granted by the Company is estimated on the date of grant using the Black-Scholes-Merton option-pricing model which uses assumptions for expected volatility, expected dividend yield, expected term, and the risk-free interest rate. Expected volatilities are based on historical volatility of the common stock. The term of employee options and warrants granted is based on historical exercises of employee options and warrants. The term of non-employee warrants is based on the term of the associated contract. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period of the expected term as described.
The assumptions used in calculating the fair value of employee common stock options and warrants granted during the nine months ended September 30, 2014 and 2013 , using the Black-Scholes-Merton option-pricing model are set forth in the following table:

25



 
Nine Months Ended September 30,
 
2014
 
2013
Expected volatility
51.0
%
 
60.0
%
Expected life (in years)
5.2

 
5.2

Expected dividend yield
—

 
—

Risk-free interest rate
1.73
%
 
0.71
%
The weighted-average grant date fair value for options granted during the nine months ended September 30, 2014 was approximately $1.95 . 
The assumptions used in calculating the fair value of non-employee common stock options and warrants granted during the nine months ended September 30, 2014 and 2013 , using the Black-Scholes-Merton option-pricing model are set forth in the following table:
 
Nine Months Ended September 30,
 
2014
 
2013
Expected volatility
51.0
%
 
n/a
Expected life (in years)
5.0

 
n/a
Expected dividend yield
—

 
n/a
Risk-free interest rate
1.74
%
 
n/a
The weighted-average grant date fair value for warrants granted during the nine months ended September 30, 2014 was approximately $1.79 . 
Employee Common Stock Options
 
Activity with respect to employee stock options is summarized as follows: 
 
 
Number of
Shares (000's)
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term   (in years)
 
Aggregate
Intrinsic
Value (in 000’s)
Outstanding, December 31, 2013
1,804

 
$
4.54

 
 
 
 
Granted
 
55

 
$
4.23

 
 
 
 
Exercised
 
(115
)
 
$
3.71

 
 
 
 
Unvested options forfeited or cancelled
 
(411
)
 
$
4.24

 
 
 
 
Vested options expired
 
(189
)
 
$
4.37

 
 
 
 
Outstanding, September 30, 2014
1,144

 
$
4.74

 
7.2
 
$
604

Vested at September 30, 2014
675

 
$
5.20

 
6.5
 
$
295

Vested or expected to vest at September 30, 2014 (a)
1,063

 
$
4.79

 
7.1
 
$
554

      
(a) Includes forfeiture adjusted unvested shares.
 
Total unrecognized compensation expense related to non-vested stock options at September 30, 2014 was approximately $0.6 million and is expected to be recognized over a weighted-average period of 1.7 years.
The following summary information reflects stock options outstanding, vested and expected to vest, and related details as of September 30, 2014 :

26



 
 
Stock Options Outstanding
 
Options Exercisable
Exercise Price
 
Number Outstanding (000's)
 
Weighted Average Remaining Contractual Term (in years)
 
Weighted Average Exercise Price
 
Vested and Expected to Vest (000's)
 
Weighted Average Exercise Price
$1.30
 
16

 
1.1
 
$
1.30

 
16

 
$
1.30

$1.31 - $3.99
 
323

 
5.3
 
$
3.93

 
305

 
$
3.93

$4.00 - $4.30
 
450

 
8.5
 
$
4.12

 
395

 
$
4.12

$4.31 - $4.99
 
40

 
8.7
 
$
4.51

 
32

 
$
4.52

$5.00 - $7.62
 
315

 
7.3
 
$
6.67

 
315

 
$
6.67

Total
 
1,144

 
7.2
 
$
4.74

 
1,063

 
$
4.79

  Employee Common Stock Warrants  
Activity with respect to employee common stock warrants is summarized as follows: 
 
 
Number of
Shares (000's)
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term (in years)
 
Aggregate
Intrinsic
Value (in 000’s)
Outstanding, December 31, 2013
1,876

 
$
3.09

 
 
 
 
Granted
 
—

 
$
—

 
 
 
 
Exercised
 
(30
)
 
$
2.54

 
 
 
 
Unvested warrants forfeited or cancelled
 
—

 
$
—

 
 
 
 
Vested warrants expired
 
—

 
$
—

 
 
 
 
Outstanding, September 30, 2014
1,846

 
$
3.10

 
4.1
 
$
3,112

Vested at September 30, 2014
1,694

 
$
2.94

 
3.8
 
$
3,073

Vested or expected to vest at September 30, 2014 (a)
1,836

 
$
3.09

 
4.1
 
$
3,111

      
(a) Includes forfeiture adjusted unvested shares.
 
Total unrecognized compensation expense related to non-vested employee stock warrants at September 30, 2014 , was approximately $0.2 million and is expected to be recognized over a weighted-average period of 1.4 years. 
Restricted Stock

Activity with respect to restricted stock is summarized as follows: 
 
 
Number of Shares (000's)
 
Weighted Avg.
Grant Date Fair
Value
Unvested at December 31, 2013
314

 
$
3.31

Granted
 
—

 
$
—

Vested
 
(10
)
 
$
4.34

Forfeited
 
—

 
$
—

Unvested at September 30, 2014
304

 
$
3.28

 
Total unrecognized compensation expense related to non-vested restricted stock at September 30, 2014 , was approximately $0.2 million and is expected to be recognized over a weighted-average period of 1.0 years.
 
Non-employee Common Stock Warrants
 

27



The Company grants common stock warrants in connection with equity share purchases by investors as an additional incentive for providing long-term equity capital to the Company and as additional compensation to consultants and advisors. The warrants are granted at negotiated prices in connection with the equity share purchases and at the market price of the common stock in other instances. The warrants have been issued for terms between two and ten years.
On March 28, 2014, the Company issued to the placement agents in the Company’s offering of the 2014 Notes, as partial compensation for serving as placement agents in such offering, five -year warrants to purchase an aggregate of 48,889 shares of common stock at an exercise price of $4.50 per share. The exercise price of the warrants is subject to certain anti-dilution adjustments. The warrants were issued, and the shares of common stock issuable upon exercise of the warrants will be issued, without registration under the Securities Act in reliance upon the exemption from registration set forth in Rule 506(b) of Regulation D promulgated pursuant to Section 4(a)(2) of the Securities Act. The Company based such reliance upon representations made by the placement agents to the Company regarding lack of general solicitation and the placement agents’ investment intent, sophistication and status as an “accredited investor,” as defined in Regulation D, among other things.
Activity with respect to non-employee common stock warrants is summarized as follows:    
 
 
Number of
Shares (000's)
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term   (in years)
 
Aggregate
Intrinsic
Value (000's)
Outstanding, December 31, 2013
1,989

 
$
3.84

 
 
 
 
Granted
 
49

 
$
4.50

 
 
 
 
Exercised
 
(897
)
 
$
3.62

 
 
 
 
Unvested warrants forfeited or cancelled
 
—

 
$
—

 
 
 
 
Vested warrants expired
 
(325
)
 
$
4.51

 
 
 
 
Outstanding, September 30, 2014
816

 
$
3.86

 
1.8
 
$
716

Vested at September 30, 2014
816

 
$
3.86

 
1.8
 
$
716

Vested or expected to vest at September 30, 2014 (a)
816

 
$
3.86

 
1.8
 
$
716

(a) Includes forfeiture adjusted unvested shares.

    

28



The table below reflects the outstanding options and warrants by exercise price:
Options (000's)
 
Employee Warrants (000's)
 
Non-employee Warrants (000's)
 
Exercise Price
 
 
203

 
 
 
$
1.04

16

 
 
 
 
 
$
1.30

 
 
 
 
13

 
$
1.73

 
 
199

 
 
 
$
1.93

 
 
222

 
 
 
$
2.57

 
 
212

 
 
 
$
2.59

 
 
222

 
 
 
$
3.43

 
 
116

 
 
 
$
3.46

 
 
276

 
 
 
$
3.75

 
 
 
 
50

 
$
3.80

 
 
 
 
548

 
$
3.81

32

 
 
 
 
 
$
3.86

191

 
105

 
 
 
$
3.93

100

 
 
 
85

 
$
3.96

20

 
 
 
 
 
$
4.05

272

 
 
 
 
 
$
4.06

 
 
 
 
55

 
$
4.08

57

 
 
 
 
 
$
4.11

101

 
 
 
 
 
$
4.30

 
 
116

 
 
 
$
4.32

15

 
 
 
 
 
$
4.33

 
 
 
 
16

 
$
4.37

 
 
 
 
49

 
$
4.50

 
 
105

 
 
 
$
4.58

25

 
 
 
 
 
$
4.61

105

 
 
 
 
 
$
5.71

 
 
70

 
 
 
$
5.90

105

 
 
 
 
 
$
6.67

105

 
 
 
 
 
$
7.62

1,144

 
1,846

 
816

 
 
 
NOTE 13.  .                      VARIABLE INTEREST ENTITY
 
As further described in Note 14 to our Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 , the Company has one variable interest entity that is required to be consolidated because AdCare has control as primary beneficiary. A “primary beneficiary” is the party that has both of the following characteristics:  (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
On June 22, 2013, the Company and Riverchase Village ADK, LLC ("Riverchase"), an entity which is owned and controlled by Christopher Brogdon (the Company’s Vice Chairman and a greater than 5% beneficial owner of the common stock) and which is our VIE, agreed to mutually terminate the five -year management agreement, dated June 22, 2010, pursuant to which a subsidiary of the Company supervised the management of the Riverchase Village facility, a 105 -bed assisted living facility located in Hoover, Alabama and owned by Riverchase, for a monthly fee equal to 5% of the monthly gross revenues of the Riverchase Village facility.     

29



During the fourth quarter of 2013, Riverchase entered into a sales listing agreement to sell the Riverchase Village facility. On April 1, 2014, Riverchase entered into a purchase and sale agreement to sell the Riverchase Village facility to a third-party purchaser; however, the agreement was terminated on August 6, 2014.
On March 3, 2014, the Company and certain of its subsidiaries entered into a letter agreement, dated as of February 28, 2014 (the "Letter Agreement"), with Mr. Brogdon and entities controlled by Mr. Brogdon, which: (i) amended the Company's previously-existing option to acquire all of the issued and outstanding membership interests in Riverchase until June 22, 2015; and (ii) reduced the purchase price for the exercise of such option to $1.00 . Furthermore, the Letter Agreement provides that, upon the closing of the sale of the Riverchase Village facility to an arms-length third party purchaser, regardless of whether the Company has exercised its option to purchase Riverchase, the net sales proceeds from such sale shall be distributed as follows: (a) one-half of the net sales proceeds will be paid to the Company; (b) the remaining net sales proceeds will be paid to the Company to satisfy the outstanding principal balance and interest (if any) then due under the promissory note issued by Mr. Brogdon in favor of the Company with an original principal amount of $523,663 , with such payment to be applied in the order of scheduled amortization under the note; and (c) the balance of net sales proceeds will be paid to the Company.
On May 15, 2014, the Company and certain of its subsidiaries entered into an Amendment to the Letter Agreement (the "Letter Agreement First Amendment"), pursuant to which the Company agreed to pay $92,323 (the "Tax Payment") to the appropriate governmental authorities of Jefferson County, Alabama, such amount representing outstanding real property taxes due on the Riverchase Village facility. The Company determined that it was in its best interest to make the Tax Payment in order to preserve the Company's interest in the sale of the Riverchase Village facility. In connection with the Tax Payment, the parties also agreed to amend and restate the promissory note issued by Mr. Brogdon in favor of the Company to reflect a new principal amount of $615,986 , which amount represents the original principal amount of the note plus the Tax Payment. Furthermore, the Letter Agreement First Amendment amended the Letter Agreement to provide that, if the closing of the sale of the Riverchase Village facility does not occur on or before December 31, 2014, then a payment of principal under the amended and restated promissory note equal to the Tax Payment will be due and payable to the Company on or before January 31, 2015.
The note issued by Mr. Brogdon in favor of the Company was further amended and restated on October 10, 2014 to: (i) reduce the principal amount of the note by an amount equal to the Tax Payment plus $255,000 , which represents an offset of amounts owed by the Company to Mr. Brogdon under his Consulting Agreement; and (ii) provide that the net sales proceeds from any sale of the Riverchase Village facility shall be first distributed to satisfy amounts outstanding under the promissory note issued by Riverchase in favor of the Company on October 10, 2014. The current principal balance of the promissory note issued by Mr. Brogdon in favor of the Company is $268,663 . See "Note 15. Related Party Transactions" and "Note 16. Subsequent Events".
The following summarizes the assets and liabilities of the variable interest entity included in the consolidated balance sheets:
(Amounts in 000’s)
 
September 30, 2014
 
December 31, 2013
Cash
 
$
2

 
$
11

Accounts receivable
 
—

 
92

Assets of variable interest entity held for sale
 
5,894

 
5,945

Other assets
 
347

 
371

Total assets
 
$
6,243

 
$
6,419

 
 
 
 
 
Accounts payable
 
$
1,919

 
$
1,791

Accrued expenses
 
552

 
228

Liabilities of variable interest entity held for sale
 
5,954

 
6,034

Noncontrolling interest
 
(2,182
)
 
(1,634
)
   Total liabilities and equity
 
$
6,243

 
$
6,419



30



NOTE 14.                        COMMITMENTS AND CONTINGENCIES
 
Regulatory Matters
 
Laws and regulations governing federal Medicare and state Medicaid programs are complex and subject to interpretation. Compliance with such laws and regulations can be subject to future governmental review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from certain governmental programs. The Company believes that it is in compliance in all material respects with all applicable laws and regulations. 
A significant portion of the Company’s revenue is derived from Medicaid and Medicare, for which reimbursement rates are subject to regulatory changes and government funding restrictions. Any significant future change to reimbursement rates could have a material effect on the Company’s operations. 
Operating Leases

     The Company leases certain office space and nine  skilled nursing facilities under non-cancelable operating leases, most of which have initial lease terms of ten to twelve years with rent escalation clauses and provisions for payments by the Company of real estate taxes, insurance and maintenance costs.  Facility rent expense totaled $1.7 million and $5.1 million for the three and nine months ended September 30, 2014 , respectively, and $1.7 million and $5.1 million for the three and nine months ended September 30, 2013 , respectively.
Five of the Company’s skilled nursing facilities are operated under a single master indivisible lease arrangement. The lease has a term of 10 years ending in 2020. Under the master lease, a breach at a single facility could subject one or more of the other facilities covered by the same master lease to the same default risk. Failure to comply with regulations or governmental authorities, such as Medicare and Medicaid provider requirements, is a default under the master lease agreement. In addition, other potential defaults related to an individual facility may cause a default under the master lease agreement. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord. The Company is not aware of any defaults and believes it is in compliance with the covenants of the master lease agreement as of September 30, 2014 . 
Two of the Company’s skilled nursing facilities are operated under a separate lease agreement. The lease is a single indivisible lease; therefore, a breach at a single facility could subject the second facility to the same default risk. The lease has a term of 12  years ending in 2022 and includes covenants and restrictions. A commitment is included that requires minimum capital expenditures of $375 per licensed bed per lease year at each facility, which amounts to $0.1 million per year for both facilities. As of September 30, 2014 , the Company believes it is in compliance with all financial and administrative covenants of this lease agreement. 
On July 1, 2014, a certain wholly-owned subsidiary of the Company entered into an agreement to sublease one of its skilled nursing and rehabilitation facilities located in south Georgia to a local nursing home operator. The sublease has a term of six years ending 2020.
On September 22, 2014, as part of the Company's ongoing strategic plan to transition from an owner and operator of healthcare facilities to a healthcare property holding and leasing company, two certain wholly-owned subsidiaries of the Company entered into an agreement to lease two of its skilled nursing and rehabilitation facilities in Alabama to a local nursing home operator effective November 1, 2014. Under the terms of the triple net lease agreements, the lessee will be responsible for day-to-day management, ongoing maintenance and facility improvements. The leases have a term of five years and may be extended for one separate renewal term of five years.
Legal Matters
 
The skilled nursing business involves a significant risk of liability due to the age and health of the Company’s patients and residents and the services the Company provides. The Company and others in the industry are subject to an increasing number of claims and lawsuits, including professional liability claims, which may allege that services have resulted in personal injury, elder abuse, wrongful death or other related claims. The defense of these lawsuits may result in significant legal costs, regardless of the outcome, and can result in large settlement amounts or damage awards. 
In addition to the potential lawsuits and claims described above, the Company is also subject to potential lawsuits under the Federal False Claims Act and comparable state laws alleging submission of fraudulent claims for services to any healthcare program (such as Medicare) or payer. A violation may provide the basis for exclusion from federally funded healthcare programs.

31



As of September 30, 2014 , the Company does not have any material loss contingencies recorded or requiring disclosure based upon the evaluation of the probability of loss from known claims, except as disclosed below. 
On June 24, 2013, South Star Services, Inc. (“SSSI”), Troy Clanton and Rose Rabon (collectively, the “Plaintiffs”) filed a complaint in the District Court of Oklahoma County, State of Oklahoma against: (i) AdCare, certain of its wholly owned subsidiaries and AdCare’s former Chief Executive Officer (collectively, the “AdCare Defendants”); (ii) Christopher Brogdon and his wife; and (iii)  five entities controlled by Mr. and Mrs. Brogdon, which entities own five skilled-nursing facilities located in Oklahoma (the “Oklahoma Owners”) that were previously managed by an AdCare subsidiary (the "Oklahoma Facilities"). The complaint alleges, with respect to the AdCare Defendants, that: (i) the AdCare Defendants tortuously interfered with contractual relations between the Plaintiffs and Mr. Brogdon, and with Plaintiffs’ prospective economic advantage, relating to SSSI’s right to manage the Oklahoma Facilities and seven other skilled-nursing facilities located in Oklahoma (collectively, the “Facilities”), respectively; (ii) the AdCare Defendants fraudulently induced the Plaintiffs to perform work and incur expenses with respect to the Facilities; and (iii) one of the AdCare subsidiaries which is an AdCare Defendant provided false and defamatory information to an Oklahoma regulatory authority regarding SSSI’s management of one of the Oklahoma Facilities. The complaint seeks damages against the AdCare Defendants, including punitive damages, in an unspecified amount, as well as costs and expenses, including reasonable attorney fees. On March 7, 2014, the Plaintiffs filed an amended complaint in which they alleged additional facts regarding the alleged fraudulent inducement caused by Mr. and Mrs. Brogdon and the AdCare Defendants. On April 4, 2014, the Company responded to the amended complaint and filed a motion to dismiss the case and is waiting on a decision by the court. The trial is scheduled to begin in April 2015. The Company believes that the complaint is without merit and intends to vigorously defend itself against the claims set forth therein.
On October 2, 2013, the Company responded to certain letters received from Georgia Department of Community Health ("GDCH") in September 2013 requesting payment of past due provider fees totaling $1.2 million for certain nursing facilities for periods prior to the Company's operation of the facilities. The Company received a final determination from GDCH in April 2014 confirming the Company was responsible for the payment of approximately $0.1 million relating to these past due provider fees. The Company paid these past due provider fees in the second quarter of 2014.
On March 7, 2014, the Company responded to a letter received from the Ohio Attorney General ("OAG") dated February 25, 2014 demanding repayment of approximately $1.0 million as settlement for alleged improper Medicaid payments related to seven Ohio facilities affiliated with the Company. The OAG alleged that the Company had submitted improper Medicaid claims for independent laboratory services for glucose blood tests and capillary blood draws. The Company intends to defend itself against the claims. The Company has not recorded a liability for this matter because the liability, if any, and outcome can not be determined at this time.
As of September 30, 2014, the Company is owed approximately $1.2 million from a prior owner of a certain 118-bed skilled nursing facility located in Oklahoma City, Oklahoma and has submitted the matter to a commercial arbitrator in order to resolve the issue. On October 30, 2014, the Company and the prior owner entered into a settlement agreement. The Company has not recorded a reserve against this receivable because the Company believes the amount will be collected.
Income Tax Examination
In early 2014, the Internal Revenue Service ("IRS") initiated an examination of the Company's income tax return for the 2011 income tax year. On May 7, 2014, the IRS completed and closed the examination and no changes were required to the Company's 2011 income tax return. To the Company's knowledge, it is not currently under examination by any other major income tax jurisdiction.
NOTE 15.                        RELATED PARTY TRANSACTIONS
Purchase Agreement - Riverchase
On April 1, 2014, Riverchase entered into a purchase and sale agreement to sell the Riverchase Village facility to a third-party purchaser; however, the agreement was terminated on August 6, 2014.
Consulting Agreement
On May 6, 2014, the Company and Mr. Brogdon entered into an Amendment to Consulting Agreement (the "Amended Consulting Agreement"), which amended that certain Consulting Agreement, dated December 31, 2012, between the Company and Mr. Brogdon (the "Original Consulting Agreement"), to restructure amounts payable to Mr. Brogdon thereunder. As compensation for his services under the Original Consulting Agreement, Mr. Brogdon was entitled to receive: (i) $10,000 per

32



month in year one of the agreement; (ii) $15,000 per month in year two of the agreement; and (iii) $20,000 per month in year three of the agreement. The Amended Consulting Agreement eliminated the monthly payments to Mr. Brogdon and instead provides for an aggregate consulting fee equal to $400,000 (the "Consulting Fee"), paid or payable as described below:
•
Under the Amended Consulting Agreement, Mr. Brogdon is entitled to receive a success fee of $25,000 (increased from $20,000 under the Original Consulting Agreement) for each potential acquisition identified by Mr. Brogdon which the Company completes (the “Success Fee”); provided, however, that the Success Fee shall not exceed $160,000 in any calendar year without a majority vote of the Board of Directors.

•
The fee originally payable to Mr. Brogdon upon termination of the Original Consulting Agreement without cause (approximately $550,000 for such termination prior to a change of control and approximately $1.1 million for such termination within six months after a change of control) was eliminated in the Amended Consulting Agreement. Instead, Mr. Brogdon will receive a fee of $500,000 if a change of control occurs on or before May 1, 2015 (the “Change of Control Fee”) and the Amended Consulting Agreement has not been earlier terminated. If a change of control occurs after May 1, 2015, then no Change of Control Fee is payable. The Amended Consulting Agreement will terminate immediately upon a change of control and the unpaid portion of the Consulting Fee, any accrued and unpaid Success Fee and Change of Control Fee (if applicable) will be paid to Mr. Brogdon upon the closing of the change of control.

On May 6, 2014, the Company paid a one-time payment of $ 100,000 in respect to the Consulting Fee, with the remainder of the Consulting Fee payable in monthly payments of $15,000 , commencing June 1, 2014, until paid in full. The Amended Consulting Agreement also provided that, notwithstanding the foregoing, if the Riverchase Village facility (which is owned by an entity which is owned and controlled by Mr. Brogdon and that is our VIE) was sold prior to September 1, 2014, then the amount of the unpaid Consulting Fee would be reduced by (and offset against) the aggregate principal balance owed by Mr. Brogdon to the Company under the promissory note executed by Mr. Brogdon in favor of the Company, with any remaining balance of the Consulting Fee owed to Mr. Brogdon to be paid in cash at closing. However, because the sale of the Riverchase Village facility was not completed prior to September 1, 2014, the balance of the Consulting Fee owed to Mr. Brogdon by the Company in the amount of $255,000 was offset against the remaining amount owed by Mr. Brogdon to the Company under the promissory note, thereby reducing the principal amount of the promissory note to $268,663 . See "Note 13. Variable Interest Entity" and "Note 16. Subsequent Events".
Termination of Sublease
On May 6, 2014, ADK Administrative Property, LLC, a wholly owned subsidiary of the Company (“ADK Admin”), and Winter Haven Homes, Inc. (“Winter Haven”), an entity controlled by Mr. Brogdon, entered into a Sublease Termination Agreement, pursuant to which ADK Admin and Winter Haven terminated, effective as of May 31, 2014, that certain Sublease Agreement between them dated as of May 1, 2011. Pursuant to the Sublease Agreement, ADK Admin subleased from Winter Haven certain office space located at Two Buckhead Plaza, Atlanta, Georgia, with rent of approximately $5,000 payable monthly through November 2018. The sublease termination agreement terminated, as of May 31, 2014, all obligations of ADK Admin under the Sublease Agreement, including all obligations to pay rent. Winter Haven agreed to the termination of the sublease agreement in consideration for a portion of the amounts payable to Mr. Brogdon pursuant to the Amended Consulting Agreement.
NOTE 16.                        SUBSEQUENT EVENTS
 
The Company has evaluated all subsequent events through the date the consolidated financial statements were issued and filed with the Securities and Exchange Commission. The following is a summary of the material subsequent events.
Debt Modifications
On October 1, 2014, a certain wholly-owned subsidiary of the Company entered into a Modification Agreement with Red Mortgage Capital, LLC ("Red") and the Secretary of Urban Housing and Development ("Secretary") which modified that certain Loan Agreement, dated July 29, 2008. The modification, among other things: (i) reduces the rate of interest therein provided from 6.50% per annum to 4.20% per annum, effective as of November 1, 2014; (ii) revises the amount of monthly installments of interest and principal payable on and after December 1, 2014, so as to re-amortize in full the loan over the remaining term thereof; and (iii) modifies the prepayment provision of the loan.

On October 1, 2014, a certain wholly-owned subsidiary of the Company entered into a Modification Agreement with
Red and the Secretary which modified that certain Loan Agreement, dated November 27, 2007. The modification, among other things: (i) reduces the rate of interest therein provided from 5.95% per annum to 4.16% per annum, effective as of November 1,

33

2014; (ii) revises the amount of monthly installments of interest and principal payable on and after December 1, 2014, so as to re-amortize in full the loan over the remaining term thereof; and (iii) modifies the prepayment provision of the loan.
Second Amendment to Letter Agreement
On October 10, 2014, AdCare and certain of its subsidiaries entered into a second amendment to the Letter Agreement (the "Letter Agreement Second Amendment"), with Mr. Brogdon and entities controlled by Mr. Brogdon, pursuant to which the Company reduced the principal amount of the note issued by Mr. Brogdon by the amount equal to $92,323 (which represents the amount of the Tax Payment) plus $255,000 (which represents an offset of amounts owed by the Company to Mr. Brogdon under the Amended Consulting Agreement). As described below under the caption "Riverchase", the principal amount of the note was reduced by the amount of the Tax Payment because a new promissory note was issued by Riverchase in favor of the Company that included such amount owed. The principal balance of the promissory note issued by Mr. Brogdon in favor of the Company is currently $268,663 . See "Note 13. Variable Interest Entity" and "Note 15. Related Party Transactions".
Riverchase
The Company is a guarantor of Riverchase’s obligations with respect to certain revenue bonds (the "Bonds") issued by the City of Hoover in connection with the Riverchase Village facility, and in order to preserve the Company's interest in the sale of the Riverchase Village facility, the company made a payment in the amount of $85,000 (the "Principal Obligation") on behalf of Riverchase with respect to its obligations under the Bonds. On October 10, 2014, Riverchase issued a promissory note in favor of the Company in the principal amount of $177,323 , which represents the amount of Tax Payment plus the Principal Obligation. The note does not bear interest and is due upon the closing of the sale of the Riverchase Village facility.
The Letter Agreement Second Amendment amended the Letter Agreement to provide that upon the closing of the sale of the Riverchase Village facility to a third party purchaser, the net sales proceeds from such sale shall be distributed so that any net sales proceeds shall first be paid to the Company to satisfy the $177,323 amount outstanding under the note issued by Riverchase to the Company. See "Note 13. Variable Interest Entity".
Lumber City
On October 22, 2014, a wholly-owned subsidiary of the Company entered into an agreement to sublease one of its skilled nursing and rehabilitation facilities located in Lumber City, Georgia to a local nursing home operator commencing on November 1, 2014.
Dublin
On October 22, 2014, a wholly-owned subsidiary of the Company entered into an agreement to sublease one of its skilled nursing and rehabilitation facilities located in Dublin, Georgia to a local nursing home operator commencing on November 1, 2014.
Ohio
On October 29, 2014, a wholly-owned subsidiary of the Company entered into an agreement to sublease one of its assisted living facilities located in Springfield, Ohio to a local nursing home operator commencing on December 1, 2014.
On October 29, 2014, a wholly-owned subsidiary of the Company entered into an agreement to lease one of its skilled nursing and rehabilitation facilities located in Sidney, Ohio to a local nursing home operator commencing on the first day of the month after lessee's receipt (i) of all licenses and other approvals from the State of Ohio to operate the facility and (ii) approval of the lease by the United States Department of Housing and Urban Development.
On October 29, 2014, a wholly-owned subsidiary of the Company entered into an agreement to sublease one of its skilled nursing and rehabilitation facilities located in Covington, Ohio to a local nursing home operator commencing on the first day of the month after sublessee's receipt (i) of all licenses and other approvals from the State of Ohio to operate the facility and (ii) approval of the lease by the United States Department of Housing and Urban Development.
On October 29, 2014, a wholly-owned subsidiary of the Company entered into an agreement to sub-sublease one of its skilled nursing and rehabilitation facilities located in Springfield, Ohio to a local nursing home operator commencing on the first day of the month after sublessee's receipt (i) of all licenses and other approvals from the State of Ohio to operate the facility and (ii) approval of the lease by the United States Department of Housing and Urban Development.
On October 29, 2014, a wholly-owned subsidiary of the Company entered into an agreement to sublease one of its skilled nursing and rehabilitation facilities located in Greenfield, Ohio to a local nursing home operator commencing on the

34

first day of the month after sublessee's receipt (i) of all licenses and other approvals from the State of Ohio to operate the facility and (ii) approval of the lease by the United States Department of Housing and Urban Development.








    


35

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview
 
AdCare Health Systems, Inc. (“AdCare”) and its controlled subsidiaries (collectively with AdCare, the “Company” or “we”), own and operate skilled nursing and assisted living facilities in the states of Alabama, Arkansas, Georgia, Missouri, North Carolina, Ohio, Oklahoma and South Carolina. The Company, through wholly owned separate operating subsidiaries, as of September 30, 2014 , operates 37 facilities comprised of 34 skilled nursing facilities, two assisted living facilities and one independent living/senior housing facility totaling approximately 4,200 beds. The Company’s facilities provide a range of health care services to their patients and residents including, but not limited to, skilled nursing and assisted living services, social services, various therapy services, and other rehabilitative and healthcare services for both long-term residents and short-stay patients. As of September 30, 2014 , of the total 37 facilities, the Company owned and operated 25 facilities, leased and operated eight facilities, and managed four facilities for third parties.
In the fourth quarter of 2012, the Company entered into an agreement to sell six assisted living facilities located in Ohio. The Company also entered into a sublease arrangement in the fourth quarter of 2012 to exit the operations of a skilled nursing facility in Jeffersonville, Georgia. On June 12, 2013, the Company executed two sublease agreements to exit the skilled nursing business in Tybee Island, Georgia effective June 30, 2013 relating to two facilities. During the fourth quarter of 2013, Riverchase Village ADK, LLC ("Riverchase"), our consolidated variable interest entity, entered into a sales listing agreement to sell Riverchase Village, a 105 -bed assisted living facility located in Hoover, Alabama. Riverchase subsequently entered into a purchase sale agreement on April 1, 2014 but the purchase sale agreement was terminated on August 6, 2014.
During the first quarter of 2014, the Company executed a representation agreement to sell Companions Specialized Care Center ("Companions"), a 102- bed skilled nursing facility located in Tulsa, Oklahoma to exit the operations. On July 1, 2014, the Company entered into an agreement effective July 1, 2014 to sublease a 52-bed skilled nursing facility located in Thomasville, Georgia to a local nursing home operator.
The home health business, the six Ohio assisted living facilities, the Jeffersonville, Georgia skilled nursing facility, the two facilities in Tybee Island, Georgia, the assisted living facility in Hoover, Alabama, the skilled nursing facility in Tulsa, Oklahoma, and skilled nursing facility in Thomasville, Georgia are reported as discontinued operations (see Note 10 - Discontinued Operations ).
The Company owns and manages skilled nursing facilities (“SNF”) and assisted living facilities.  The Company delivers skilled nursing and assisted living services through wholly owned separate operating subsidiaries. During the first quarter of 2014 , the Company discontinued management services on eight facilities, bringing our Company’s total bed count to 4,201 at September 30, 2014 . The following tables provide summary information regarding our facility composition: 
 
 
September 30, 2014
 
September 30, 2013
Cumulative number of facilities
 
37

 
44

Cumulative number of operational beds
 
4,201

 
4,504

 
 
 
 
 
Number of Facilities at
 
 
 
 
September 30, 2014
State
 
Number of
Operational
Beds/Units
 
Owned
 
Leased
 
Managed
For Third
Parties
 
Total
Alabama
 
304

 
2

 
—

 
—

 
2

Arkansas
 
1,041

 
10

 
—

 
—

 
10

Georgia
 
1,588

 
4

 
6

 
1

 
11

Missouri
 
80

 
—

 
1

 
—

 
1

North Carolina
 
106

 
1

 
—

 
—

 
1

Ohio
 
705

 
4

 
1

 
3

 
8

Oklahoma
 
197

 
2

 
—

 
—

 
2

South Carolina
 
180

 
2

 
—

 
—

 
2

Total
 
4,201

 
25

 
8

 
4

 
37

 
Facility Type
 
Number of
Operational
Beds/Units
 
Owned
 
Leased
 
Managed
For Third
Parties
 
Total
Skilled Nursing
 
4,006

 
23

 
8

 
3

 
34

Assisted Living
 
112

 
2

 
—

 
—

 
2

Independent Living
 
83

 
—

 
—

 
1

 
1

Total
 
4,201

 
25

 
8

 
4

 
37


Liquidity
 
For the nine months ended and as of September 30, 2014 , we had a net loss of $8.9 million and negative working capital of $35.0 million . At September 30, 2014 , we had $12.9 million in cash and cash equivalents and $151.3 million in indebtedness, including current maturities and discontinued operations, of which $56.3 million is current debt (including the Company’s outstanding subordinated convertible promissory notes with a principal amount of $7.5 million and $6.5 million that mature in July 2015 and April 2015 , respectively). Our ability to achieve profitable operations is dependent on continued growth in revenue and controlling costs. 
On July 23, 2014, the Company announced that the Board of Directors had approved, and management has begun to implement, a strategic plan (the "New Plan") to transition the Company to a healthcare property holding and leasing company. On October 14, 2014, the Company held a special meeting of shareholders in Atlanta, Georgia, in which the shareholders approved the additional leasing transactions which transactions may constitute the lease of all or substantially all of the Company's property under Georgia law.
The Company's final assessment of liquidity and profitability under the New Plan is dependent on the timing of the leasing and sub-leasing transactions contemplated by the New Plan. However, the Company believes the New Plan, when fully implemented, will enhance cash flow from operations, reduce capital expenditure requirements, and require significantly less working capital.
We estimate that cash flow from operations and other working capital changes under the existing business model will be approximately $8.0 million and cash outlays for capital expenditures, dividends on our Series A Preferred Stock and income taxes will total approximately $3.1 million for the twelve months ending September 30 , 2015. We anticipate that scheduled debt service (excluding approximately $21.0 million of bullet maturities due in February 2015 that the Company believes will be refinanced on a longer term basis and $6.5 million and $7.5 million in outstanding subordinated convertible promissory notes that mature in April 2015 and July 2015 , respectively, but including principal and interest), will total approximately $16.1 million for the twelve months ending September 30 , 2015. We anticipate the conversion to common stock of $6.5 million and $7.5 million of the Company's outstanding subordinated convertible promissory notes that mature in April 2015 and July 2015, respectively. These promissory notes are convertible into shares of common stock of the Company at $4.50 per share and $4.17 per share, respectively. The closing price of the common stock exceeded $4.17 per share from January 1, 2014 through November 7, 2014 and exceeded $4.50 per share from July 23, 2014 through October 9, 2014. As discussed further below, if we were unable to refinance the $21.0 million of bullet maturities due in February 2015, then the Company may be required to restructure its outstanding indebtedness, implement further cost reduction initiatives, or sell assets due to our limited liquidity in such an event.
During February and March 2014, the Company issued 693,761 shares of common stock to holders of the Company's warrants dated September 30, 2010 upon conversion at an exercise price of $3.57 per share. The Company received proceeds of approximately $2.3 million , net of broker commissions of approximately $0.1 million . On March 28, 2014, we received net proceeds of approximately $6.3 million from the issuance and sale of the Company's 10% subordinated convertible promissory notes due April 30, 2015.
We routinely have ongoing discussions with existing and potential new lenders to refinance current debt on a longer term basis and, in recent periods, have refinanced shorter term acquisition debt, including seller notes, with traditional longer term mortgage notes, some of which have been executed under government guaranteed lending programs. We have been successful in recent years in raising new equity capital and believe, based on recent discussions, that these markets will continue to be available to us for raising capital in 2015.
Based on existing cash balances, anticipated cash flows for the twelve months ending September 30 , 2015, the anticipated refinancing $21.0 million of bullet maturities due February 2015, and the expected conversion of $2.9 million of the Company's outstanding subordinated convertible promissory notes that mature in July 2015 , which excludes subordinated convertible promissory notes with a principal amount in the aggregate of $1.1 million that were converted into shares of common stock of the Company in July and August 2014 (see Note 8 - Notes Payable and Other Debt ), and $6.5 million of subordinated convertible

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promissory notes due April 2015 , into shares of common stock, we believe there will be sufficient funds for our operations, scheduled debt service, and capital expenditures at least through the next 12 months . On a longer term basis, at September 30 , 2014 we have approximately $36.0 million of debt payments and maturities due between October 2015 and September 2018. We believe our long-term liquidity needs will be satisfied by these same sources, borrowings as required to refinance indebtedness and new sources of equity capital. 
In order to satisfy our capital needs, we will seek to: (i) implement the New Plan and if there are delays in leasing and sub-leasing transactions contemplated by the New Plan, we will continue to improve our operating results by increasing facility occupancy, optimizing our payor mix by increasing the proportion of sub-acute patients within our skilled nursing facilities, and continuing our cost optimization and efficiency strategies; (ii) expand our borrowing arrangements with certain existing lenders; (iii) refinance current debt where possible to obtain more favorable terms; and (iv) raise capital through the issuance of debt or equity securities. We anticipate that these actions, if successful, will provide the opportunity for us to maintain liquidity on a short and long term basis, thereby permitting us to meet our operating and financing obligations for the next 12 months. However, there is no guarantee that such actions will be successful or that anticipated operating results will be achieved. We currently have limited borrowing availability under our existing revolving credit facilities. If the Company is unable to improve operating results, expand existing borrowing agreements, refinance current debt (including $21.0 million of bullet maturities due February 2015), the subordinated convertible promissory notes due July 2015 and April 2015 are not converted into shares of common stock and are required to be repaid by us in cash, then the Company may be required to restructure its outstanding indebtedness, implement further cost reduction initiatives, sell assets, or delay or modify its strategic plan.
Acquisitions
 
On February 15, 2013, the Company entered into a Purchase and Sale Agreement with Avalon Health Care, LLC to acquire certain land, buildings, improvements, furniture, vehicles, contracts, fixtures and equipment comprising: (i) a 180-bed skilled nursing facility known as Bethany Health and Rehab; and (ii) a 240-bed skilled nursing facility known as Trevecca Health and Rehab, both located in Nashville, Tennessee. The Company deposited $0.4 million of earnest money escrow deposits in February 2013. On June 1, 2013, the Purchase and Sale Agreement was terminated due to the failure of the transaction to close by May 31, 2013. In connection with the termination of the Purchase and Sale Agreement, the Company sought the return of $0.4 million previously deposited earnest money escrow deposits. On August 1, 2013, the Company entered into a settlement agreement regarding the return of the $0.4 million previously deposited earnest money escrow deposits. Pursuant to the agreement, the previously deposited earnest money escrow deposits were released and distributed, $0.3 million to the Company and $0.1 million to Avalon, respectively. 
The Company incurred acquisition costs of approximately $0.03 million and $0.6 million during the three and nine months ended September 30, 2013 , respectively. Acquisition costs are recorded  in “Other Income (Expense)” section of the Consolidated Statements of  Operations. There were no acquisition costs during the three and nine months ended September 30, 2014 .    
Divestitures

In the fourth quarter of 2012, the Company entered into an agreement to sell six assisted living facilities located in Ohio. The Company also entered into a sublease arrangement in the fourth quarter of 2012 to exit the operations of a skilled nursing facility in Jeffersonville, Georgia.
On February 28, 2013, the Company completed the sale of the facility known as Lincoln Lodge Retirement Residence and used the proceeds to pay the principal balance of the HUD mortgage note with respect to the facility of $1.9 million. The Company recognized a gain on the sale of approximately $0.1 million and cash proceeds, net of costs and debt payoff, of $0.6 million. 
On May 6, 2013, Hearth & Home of Vandalia, Inc. (the “Vandalia Seller”), a wholly owned subsidiary of the Company, sold to H & H of Vandalia LLC (the “Vandalia Purchaser”), pursuant to that certain Agreement of Sale, dated October 11, 2012 and amended December 28, 2012 (as amended, the “Ohio Sale Agreement”), between the Company and certain of its subsidiaries, including the Vandalia Seller (together, the “Ohio ALF Sellers”), on the one hand, and CHP Acquisition Company, LLC (“CHP”) on the other hand, certain land, buildings, improvements, furniture, fixtures and equipment comprising the Vandalia facility located in Vandalia, Ohio. CHP had previously assigned its rights in the Ohio Sale Agreement with respect to the Vandalia facility to the Vandalia Purchaser.
The sale price for the Vandalia facility consisted of, among other items: (i) an assumption, by the Vandalia Purchaser, of a mortgage in an aggregate amount of $3.6 million (the “Vandalia Mortgage”) that secures the Vandalia facility; and (ii) a release of the Vandalia Seller from its obligations to Red Mortgage Capital, LLC (the “Vandalia Mortgagee”) and HUD with

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respect to the Vandalia Mortgage, pursuant to a release and assumption agreement entered into among the Vandalia Purchaser, the Vandalia Seller, HUD and the Vandalia Mortgagee. In connection with the sale of the Vandalia facility, the Vandalia Seller and Vandalia Purchaser also entered into an assignment and assumption agreement of trust funds and service contracts, containing customary terms and conditions.
In June 2013, the Company entered into a Release Agreement with CHP amending the terms of the $3.6 million Seller Note issued in the connection with the sale of four of the six Ohio assisted living facilities sold to CHP in the fourth quarter of 2012. In exchange for a reduction in the Vandalia purchase price by $0.4 million , CHP agreed to immediately payoff the Seller Note resulting in a net payment of $3.2 million . Proceeds from the $3.2 million payment were used to fund a $2.0 million increase in collateralized restricted cash required by one of the Company’s lenders and $1.2 million was received by the Company for working capital purposes. The Company recognized a loss on the sale of Vandalia of $0.4 million .
On June 11, 2013, the Company completed the sale of its former Springfield, Ohio corporate office building which was sold for the approximate net book value. The Company used the proceeds to pay off the principal balance of the mortgage note with respect to the building of approximately $0.1 million .
On June 12, 2013, the Company executed two sublease agreements to exit the skilled nursing business in Tybee Island, Georgia effective June 30, 2013 relating to two facilities.
During the fourth quarter of 2013, Riverchase, our consolidated variable interest entity, entered into a sales listing agreement to sell Riverchase Village, a 105 -bed assisted living facility located in Hoover, Alabama. Riverchase subsequently entered into a purchase sale agreement on April 1, 2014 but the purchase sale agreement was terminated on August 6, 2014.
During the first quarter of 2014, the Company executed a representation agreement to sell Companions, a 102 -bed skilled nursing facility located in Tulsa, Oklahoma, to exit the operations.
On July 1, 2014, the Company entered into an agreement effective July 1, 2014 to sublease a 52-bed skilled nursing facility located in Thomasville, Georgia to a local nursing home operator.
The results of operations and cash flows for the home health business, the six Ohio assisted living facilities, the Jeffersonville, Georgia skilled nursing facility, the two facilities in Tybee Island, Georgia, the assisted living facility in Hoover, Alabama, the skilled nursing facility in Tulsa, Oklahoma, and the skilled nursing facility in Thomasville, Georgia are reported as discontinued operations in 2014 and 2013.
The following table summarizes the activity of discontinued operations for the three and nine months ended September 30, 2014 and 2013 :
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in 000’s)
 
2014
 
2013
 
2014
 
2013
Total revenues from discontinued operations
 
$
1,400

 
$
2,230

 
$
5,789

 
$
10,469

Net loss from discontinued operations
 
$
(690
)
 
$
(696
)
 
$
(1,531
)
 
$
(2,998
)
Interest expense, net from discontinued operations
 
$
263

 
$
258

 
$
787

 
$
864

Loss on disposal of assets from discontinued operations
 
$
—

 
$
(20
)
 
$
—

 
$
(467
)

Primary Performance Indicators
 
The Company owns and manages skilled nursing facilities and assisted living facilities, and delivers its services through wholly owned separate operating subsidiaries. 
The Company focuses on two primary indicators in evaluating its financial performance. Those indicators are facility occupancy and patient mix. Facility occupancy is critical as higher occupancy generally leads to higher revenues. In addition, concentrating on increasing the number of Medicare covered admissions (“the patient mix”) helps in increasing revenues. The Company includes commercial insurance covered admissions that are reimbursed at the same level as those covered by Medicare in the Company’s Medicare utilization percentages and analysis. The Company also evaluates “Same Facilities” and “Recently Acquired Facilities” results. Same Facilities represent those owned and leased facilities the Company began to operate prior to July 1, 2013 . Recently Acquired Facilities results represent those owned and leased facilities the Company began to operate

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subsequent to July 1, 2013 . For the three and nine months ended September 30, 2014 and 2013 , all facilities are considered to be Same Facilities.
Patient mix at the Company’s skilled nursing facilities for the three and nine months ended September 30, 2014 and 2013 was as follows:
 
 
Patient Mix (SNF only)
 
 
Three Months Ended September 30,
 
 
2014
 
2013
Medicare
 
15.4
%
 
14.1
%
Medicaid
 
70.2
%
 
71.6
%
Other
 
14.4
%
 
14.3
%
Total
 
100
%
 
100
%

 
 
Patient Mix (SNF only)
 
 
Nine Months Ended September 30,
 
 
2014
 
2013
Medicare
 
15.6
%
 
15.5
%
Medicaid
 
70.5
%
 
70.9
%
Other
 
13.9
%
 
13.6
%
Total
 
100.0
%
 
100.0
%
    
Medicare reimburses our skilled nursing facilities under a prospective payment system (“PPS”) for certain inpatient covered services. Under the PPS, facilities are paid a predetermined amount per patient, per day, based on the anticipated costs of treating patients. The amount to be paid is determined by classifying each patient into a resource utilization group (“RUG”) category that is based upon each patient’s acuity level. In October 2010, the number of RUG categories was expanded from 53 to 66 as part of the implementation of the RUGs IV system and the introduction of a revised and substantially expanded patient assessment tool called the Minimum Data Set, version 3.0. 
On July 29, 2011, the Centers for Medicare & Medicaid Services (“CMS”) issued a final rule providing for, among other things, a net 11.1% reduction in PPS payments to skilled nursing facilities for CMS’s fiscal year 2012 (which began October 1, 2011) as compared to PPS payments in CMS’s fiscal year 2011 (which ended September 30, 2011). The 11.1% reduction is on a net basis, after the application of a 2.7% market basket increase, and reduced by a 1.0% multi-factor productivity adjustment required by the Patient Protection and Affordable Care Act of 2010 (“PPACA”). The final CMS rule also adjusted the method by which group therapy is counted for reimbursement purposes and changed the timing in which patients who are receiving therapy must be reassessed for purposes of determining their RUG category. 
The Middle Class Tax Relief and Job Creation Act of 2012 which was signed into law on February 22, 2012, extended the Medicare Part B outpatient therapy cap exceptions process through December 31, 2012. The statutory Medicare Part B outpatient therapy cap for occupational therapy (“OT”) was $1,880 for 2012, and the combined cap for physical therapy (“PT”) and speech-language pathology services (“SLP”) was also $1,880 for 2012. This is the annual per beneficiary therapy cap amount determined for each calendar year. Similar to the therapy cap, Congress established a threshold of $3,700 for PT and SLP services combined and another threshold of $3,700 for OT services. All therapy services rendered above the $3,700 amount are subject to manual medical review and may be denied unless pre-approved by the provider’s Medicare Administrative Contractor. The law requires an exceptions process to the therapy cap that allows providers to receive payment from Medicare for medically necessary therapy services above the therapy cap amount. Beginning October 1, 2012, some therapy providers may submit requests for exceptions (pre-approval for up to 20 therapy treatment days for beneficiaries at or above the $3,700 threshold) to avoid denial of claims for services above the threshold amount. The $3,700 figure is the defined threshold that triggers the provision for an exception request. Prior to October 1, 2012, there was no provision for an exception request when the threshold was exceeded. 
On July 27, 2012, CMS issued a final rule providing for, among other things, a net 1.8% increase in PPS payments to skilled nursing facilities for CMS’s fiscal year 2013 (which began on October 1, 2012) as compared to PPS payments to skilled nursing facilities in CMS’s fiscal year 2012 (which ended September 30, 2012). The 1.8% increase was on a net basis,

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reflecting the application of a 2.5% market basket increase, less a 0.7% multi-factor productivity adjustment mandated by PPACA. This increase is offset by the 2% sequestration reduction, discussed below, which became effective April 1, 2013. 
On January 1, 2013, the American Taxpayer Relief Act of 2012 (the “ATRA”) extended the therapy cap exception process for one year. The ATRA also made additional changes to the Multiple Procedure Payment Reduction previously implemented in 2010. The existing discount to multiple therapy procedures performed in an outpatient environment during a single day was 25%. Effective April 1, 2013, ATRA increased the discount rate by an additional 25% to 50%. The ATRA additionally delayed the sequestration reductions of 2% to all Medicare payments until April 1, 2013. 
On July 31, 2013, CMS issued its final rule outlining fiscal year 2014 Medicare payment rates for skilled nursing facilities. CMS estimates that aggregate payments to skilled nursing facilities will increase by $470 million, or 1.3%, for fiscal year 2014, relative to payments in 2013. This estimated increase is attributable to a 2.3% market basket increase, reduced by the 0.5% forecast error correction and further reduced by the 0.5% multi-factor productivity adjustment as required by PPACA. The forecast error correction is applied when the difference between the actual and projected market basket percentage change for the most recent available fiscal year exceeds the 0.5% threshold. For fiscal year 2012 (most recent available fiscal year), the projected market basket percentage change exceeds the actual market basket percentage change by 0.51%. The 2014 Medicare payment rates for skilled nursing facilities were effective on October 1, 2013. 
On May 1, 2014, CMS issued a proposed rule outlining fiscal year 2015 (which begins October 1, 2014) Medicare payment rates for skilled nursing facilities.    Based on proposed changes contained within this rule, CMS projects that aggregate payments to skilled nursing facilities will increase by $750 million, or 2.0%, from payments in fiscal year 2014 (which began October 1, 2013), which represents a higher update factor than the 1.3% update finalized for skilled nursing facilities in fiscal year 2014. This estimated increase is attributable to 2.4% market basket increase, reduced by the 0.4 percentage point multifactor productivity adjustment required by law.
On July 31, 2014, CMS issued a final rule outlining fiscal year 2015 (which begins October 1, 2014) Medicare payment rates for skilled nursing facilities. Based on the changes contained within the rule, CMS estimates that aggregate payments to skilled nursing facilities will increase by $750 million, or 2.0%, from payments in fiscal year 2014 (which began October 1, 2013), which represents a higher update factor than the 1.3% update finalized for skilled nursing facilities last year. This estimated increase is attributable to a 2.5% market basket increase, reduced by the 0.5 percentage point multifactor productivity adjustment required by law.
Should future changes in PPS include further reduced rates or increased standards for reaching certain reimbursement levels (including as a result of automatic cuts tied to federal deficit cut efforts or otherwise), our Medicare revenues derived from our skilled nursing facilities could be reduced, with a corresponding adverse impact on our financial condition or results of operations. 
We also derive a substantial portion of our consolidated revenue from Medicaid reimbursement, primarily through our skilled nursing business. Medicaid programs are administered by the applicable states and financed by both state and federal funds. Medicaid spending nationally has increased significantly in recent years, becoming an increasingly significant component of state budgets. This, combined with slower state revenue growth and other state budget demands, has led the Federal government to institute measures aimed at both controlling the growth of Medicaid spending and, in some instances, reducing it. 
Historically, adjustments to reimbursement under Medicare and Medicaid have had a significant effect on our revenue and results of operations. Recently enacted, pending and proposed legislation and administrative rulemaking at the federal and state levels could have similar effects on our business. Efforts to impose reduced reimbursement rates, greater discounts and more stringent cost controls by government and other payors are expected to continue for the foreseeable future and could adversely affect our business, financial condition and results of operations. Additionally, any delay or default by the Federal or state governments in making Medicare and/or Medicaid reimbursement payments could materially and adversely affect our business, financial condition and results of operations.
Average occupancy and reimbursement rates at the Company’s skilled nursing facilities for the three and nine months ended September 30, 2014 and 2013 were as follows:  

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For the Three Months Ended September 30, 2014
State (SNF only) 
 
Operational Beds at
Period End (1)
 
Period's Average
Operational Beds
 
Occupancy
(Operational Beds)
 
Medicare Utilization
(Skilled %ADC) (2)
 
Total Revenues
 
Medicare (Skilled) $PPD (3)
 
Medicaid $PPD (3)
Alabama
 
304

 
304

 
68.6
%
 
10.5
%
 
$
3,868

 
$
393.26

 
$
170.11

Arkansas
 
1,009

 
1,009

 
68.3
%
 
17.5
%
 
$
14,958

 
$
496.75

 
$
170.40

Georgia
 
1,327

 
1,327

 
89.4
%
 
15.2
%
 
$
23,407

 
$
441.62

 
$
160.19

Missouri
 
80

 
80

 
71.9
%
 
9.9
%
 
$
892

 
$
386.73

 
$
138.08

North Carolina
 
106

 
106

 
71.3
%
 
21.9
%
 
$
1,679

 
$
444.48

 
$
162.97

Ohio
 
293

 
293

 
83.3
%
 
14.3
%
 
$
5,105

 
$
439.84

 
$
164.17

Oklahoma
 
197

 
197

 
77.7
%
 
19.6
%
 
$
3,041

 
$
461.52

 
$
144.79

South Carolina
 
180

 
180

 
88.2
%
 
11.5
%
 
$
2,950

 
$
440.70

 
$
162.12

Total
 
3,496

 
3,496

 
79.3
%
 
15.4
%
 
$
55,900

 
$
455.22

 
$
162.84



 
 
For the Three Months Ended September 30, 2013
State (SNF only) 
 
Operational Beds at
Period End (1)
 
Period's Average
Operational Beds
 
Occupancy
(Operational Beds)
 
Medicare Utilization
(Skilled %ADC) (2)
 
Total Revenues
 
Medicare (Skilled) $PPD (3)
 
Medicaid $PPD (3)
Alabama
 
304

 
304

 
70.5
%
 
11.5
%
 
$
3,889

 
$
393.61

 
$
165.72

Arkansas
 
1,009

 
1,009

 
63.2
%
 
15.0
%
 
$
12,869

 
$
461.61

 
$
162.71

Georgia
 
1,327

 
1,327

 
89.5
%
 
14.7
%
 
$
23,174

 
$
452.77

 
$
156.90

Missouri
 
80

 
80

 
72.0
%
 
9.4
%
 
$
926

 
$
395.01

 
$
134.76

North Carolina
 
106

 
106

 
67.9
%
 
16.4
%
 
$
1,496

 
$
448.49

 
$
162.53

Ohio
 
293

 
293

 
83.4
%
 
12.5
%
 
$
4,931

 
$
422.42

 
$
165.95

Oklahoma
 
197

 
197

 
70.9
%
 
11.2
%
 
$
2,451

 
$
434.38

 
$
146.45

South Carolina
 
180

 
180

 
82.1
%
 
16.1
%
 
$
2,680

 
$
411.17

 
$
144.42

Total
 
3,496

 
3,496

 
77.3
%
 
14.1
%
 
$
52,416

 
$
444.47

 
$
158.14














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For the Nine Months Ended September 30, 2014
State (SNF only) 
 
Operational Beds at
Period End (1)
 
Period's Average
Operational Beds
 
Occupancy
(Operational Beds)
 
Medicare Utilization
(Skilled %ADC) (2)
 
Total Revenues
 
Medicare (Skilled) $PPD (3)
 
Medicaid $PPD (3)
Alabama
 
304

 
304

 
67.3
%
 
9.4
%
 
$
11,360

 
$
411.00

 
$
173.03

Arkansas
 
1,009

 
1,009

 
67.1
%
 
18.0
%
 
$
42,597

 
$
478.77

 
$
167.12

Georgia
 
1,327

 
1,327

 
88.3
%
 
15.4
%
 
$
68,734

 
$
452.93

 
$
158.90

Missouri
 
80

 
80

 
72.0
%
 
10.8
%
 
$
2,787

 
$
413.49

 
$
138.08

North Carolina
 
106

 
106

 
69.7
%
 
17.1
%
 
$
4,672

 
$
449.13

 
$
162.26

Ohio
 
293

 
293

 
83.9
%
 
14.9
%
 
$
15,378

 
$
436.29

 
$
164.41

Oklahoma
 
197

 
197

 
72.8
%
 
19.4
%
 
$
8,418

 
$
453.72

 
$
144.99

South Carolina
 
180

 
180

 
87.6
%
 
13.8
%
 
$
9,001

 
$
439.38

 
$
163.23

Total
 
3,496

 
3,496

 
78.1
%
 
15.6
%
 
$
162,947

 
$
455.64

 
$
161.83

 
 
 
For the Nine Months Ended September 30, 2013
State (SNF only) 
 
Operational Beds at
Period End (1)
 
Period's Average
Operational Beds
 
Occupancy
(Operational Beds)
 
Medicare Utilization
(Skilled %ADC) (2)
 
Total Revenues
 
Medicare (Skilled) $PPD (3)
 
Medicaid $PPD (3)
Alabama
 
304

 
304

 
72.1
%
 
11.2
%
 
$
11,570

 
$
392.61

 
$
166.33

Arkansas
 
1,009

 
1,009

 
61.8
%
 
17.0
%
 
$
38,400

 
$
444.21

 
$
169.55

Georgia
 
1,327

 
1,327

 
89.4
%
 
15.8
%
 
$
69,337

 
$
451.12

 
$
157.31

Missouri
 
80

 
80

 
73.7
%
 
14.3
%
 
$
2,978

 
$
417.23

 
$
134.52

North Carolina
 
106

 
106

 
73.7
%
 
15.9
%
 
$
4,816

 
$
453.74

 
$
163.74

Ohio
 
293

 
293

 
84.2
%
 
15.3
%
 
$
15,565

 
$
438.51

 
$
166.70

Oklahoma
 
197

 
197

 
72.5
%
 
14.9
%
 
$
7,658

 
$
432.03

 
$
141.69

South Carolina
 
180

 
180

 
81.8
%
 
14.1
%
 
8,062

 
402.72

 
157.27

Total
 
3,496

 
3,496

 
77.3
%
 
15.5
%
 
$
158,386

 
$
440.82

 
$
160.60

 
(1)  Excludes managed beds which are not consolidated.
(2)  ADC is the Average Daily Census.
(3)  PPD is the Per Patient Day equivalent.

Critical Accounting Policies
 
The Company prepares financial statements in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses. The Company bases estimates on historical experience, business knowledge and on various other assumptions that the Company believes to be reasonable under the circumstances at the time. Actual results may vary from our estimates. These estimates are evaluated by management and revised as circumstances change. 
There have been no significant changes during the nine months ended September 30, 2014 to the items that the Company disclosed as its critical accounting policies and use of estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 .
Results of Operations
 
Facility Occupancy and Revenue Analysis:
 
 
 
Average Occupancy
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Same Facilities (a)
 
79.7
%
 
77.5
%
 
78.7
%
 
77.6
%

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Total Revenues
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in 000’s) 
 
2014
 
2013
 
2014
 
2013
Same Facilities (a)
 
$
56,637

 
$
53,126

 
$
165,196

 
$
160,471


(a) "Same Facilities" results represent all owned and leased facilities we began operating on and prior to July 1, 2013

Comparison for the three months ended September 30, 2014 and 2013

Continuing Operations:
 
The following table sets forth, for the periods indicated, statement of operations items and the amount and percentage of change of these items. The results of operations for any particular period are not necessarily indicative of results for any future period. The following data should be read in conjunction with our consolidated financial statements and the notes thereto, which are included herein. 
 
 
Three Months Ended September 30,
 
Increase (Decrease)
(Amounts in 000’s)
 
2014
 
2013
 
Amount
 
Percent 
Revenues:
 
 

 
 

 
 

 
 

Patient care revenues
 
$
56,637

 
$
53,126

 
$
3,511

 
7
 %
Management revenues
 
354

 
521

 
(167
)
 
(32
)%
Rental revenues
 
88

 
—

 
88

 
—
 %
Total revenues
 
57,079

 
53,647

 
3,432

 
6
 %
Expenses:
 
 

 
 

 
 

 
 
Cost of services (exclusive of facility rent, depreciation and amortization)
 
47,198

 
43,802

 
3,396

 
8
 %
General and administrative expenses
 
3,578

 
4,583

 
(1,005
)
 
(22
)%
Audit committee investigation expense
 
—

 
302

 
(302
)
 
(100
)%
Facility rent expense
 
1,695

 
1,702

 
(7
)
 
—
 %
Depreciation and amortization
 
1,906

 
1,779

 
127

 
7
 %
Salary retirement and continuation costs
 
1,489

 
5

 
1,484

 
29,680
 %
Total expense
 
55,866

 
52,173

 
3,693

 
7
 %
Income from Operations
 
1,213

 
1,474

 
(261
)
 
(18
)%
Other Income (Expense):
 
 

 
 

 
 
 
 
Interest expense, net
 
(2,644
)
 
(3,204
)
 
(560
)
 
(17
)%
Acquisition costs, net of gains
 
(8
)
 
(33
)
 
(25
)
 
(76
)%
Derivative gain
 
—

 
1,989

 
(1,989
)
 
(100
)%
Loss on extinguishment of debt
 
(1,220
)
 
(6
)
 
1,214

 
20,233
 %
Loss on disposal of assets
 
—

 
(6
)
 
(6
)
 
(100
)%
Other (expense) income
 
(444
)
 
15

 
459

 
3,060
 %
Total other expense, net
 
(4,316
)
 
(1,245
)
 
3,071

 
247
 %
(Loss) Income from Continuing Operations Before Income Taxes
 
(3,103
)
 
229

 
3,332

 
1,455
 %
Income tax benefit
 
244

 
54

 
190

 
352
 %
(Loss) Income from Continuing Operations
 
$
(2,859
)
 
$
283

 
$
3,142

 
1,110
 %
 
Patient Care Revenues —Total patient care revenues increased by approximately $3.5 million , or 7% , for the three months ended September 30, 2014 as compared with the same period in 2013 .  The increase was primarily due to a slight increase in the skilled facility occupancy rate from 77.3% to 79.3%, an increase in the skilled facility average Medicare reimbursement rate per patient day from $444.47 to $455.22, or 2.4%, and an increase in the skilled patient mix percentage from 14.1% to 15.4%.

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Management Revenues— Management revenues (net of eliminations) decreased approximately $0.2 million , or 32% , for the three months ended September 30, 2014 as compared with the same period in 2013. The decrease is primarily due to the discontinuance of a management agreement effective as of March 1, 2014.
Cost of Services— Cost of services increased by $3.4 million , or 8% , during the three months ended September 30, 2014 , as compared with the same period in 2013 .  The increase is primarily due to the increase of approximately $1.1 million in pharmacy and therapy expense and approximately $1.1 million in nursing expense due to increased skilled patient mix, an increase of approximately $0.4 million in plant operations, and approximately $0.8 million increase in employee benefits. Cost of services as a percentage of patient care revenue increased from 82.4% at September 30, 2013 to 83.3% at September 30, 2014 . 
General and Administrative— General and administrative costs decreased by $1.0 million to $3.6 million for the three months ended September 30, 2014 , compared with $4.6 million for the same period in 2013 . The decrease is primarily due to the following: (i) decrease of approximately $0.4 million in contract services; (ii) decrease of approximately $0.3 million in salaries, wages and employee benefits expense; (iii) decrease of approximately $0.1 million in accounting and auditing expense; (v) decrease of approximately $0.1 million in Board of Director fees; (vi) decrease of approximately $0.1 million in travel expense; and (vii) decrease of approximately $0.1 million in recruiting costs, partially offset by an increase of approximately $0.1 million in legal fees.  As a percentage of total revenue, general and administrative costs declined to 6.3% for the three months ended September 30, 2014 , compared with 8.5% for the same period in 2013 , reflecting the announcement of the New Plan and the progress the Company has made in cost control efforts at the general and administrative level. 
Audit Committee Investigation Expense— As previously disclosed, the Audit Committee, in consultation with management, concluded in 2013 that: (i) the Company’s previously issued financial statements for the quarters ended March 31, 2012, June 30, 2012 and September 30, 2012 (the “Relevant Financial Statements”) should no longer be relied upon due to errors in the Relevant Financial Statements identified in connection with the audit of the Company’s financial statements for the year ended December 31, 2012; and (ii) the Company would restate the Relevant Financial Statements. The Audit Committee initiated a further review of, and inquiry with respect to, the accounting and financial issues related to these and other potential errors and engaged counsel to assist the Audit Committee with such matters. The Audit Committee completed its inquiry and, in connection therewith, assisted in the correction of certain errors relating to accounting and financial matters and identified certain material weaknesses in the Company’s internal control over financial reporting, including weakness in the Company’s ability to appropriately account for complex or non-routine transactions and in the quality and sufficiency of the Company’s finance and accounting resources. On July 8, 2013, the Company restated the Relevant Financial Statements by filing with the SEC amendments to its Quarterly Reports on Form 10-Q/A for the quarters ended March 31, 2012, June 30, 2012 and September 30, 2012. 
In connection with the restatement process and the Audit Committee’s review and inquiry during 2013, the Company incurred professional services costs and other expenses which have been recognized as a special charge totaling approximately $0.3 million for the three months ended September 30, 2013. 
Facility Rent Expense —Facility rent expense was approximately $1.7 million for both of the three months ended September 30, 2014 and 2013.

Depreciation and Amortization— Depreciation and amortization for the three months ended September 30, 2014 increased by $0.1 million to $1.9 million , compared to $1.8 million for the same period in 2013 . During the three months ended September 30, 2014 , we recognized an impairment charge of $0.05 million to write down the carrying value of a certain 102-bed skilled nursing facility located in Tulsa, Oklahoma. We compared the estimated fair value of the assets to their carrying value and recorded an impairment charge for the excess of carrying value over estimated fair value.
Salary Retirement and Continuation Costs— Salary Retirement and Continuation Costs was $1.5 million for the three months ended September 30, 2014 . On July 23, 2014, the Company announced the New Plan. The Company therefore incurred certain salary continuation and separation costs of approximately $1.1 million and approximately $0.4 million, respectively, related to a separation agreement with an officer of the Company for the three months ended September 30, 2014 . During the three months ended September 30, 2013 , there were no costs related to separation agreements.
Interest Expense, net— Interest expense, net decreased by $0.6 million , or 17% , to $2.6 million for the three months ended September 30, 2014 , compared with $3.2 million for the same period in 2013. The decrease is primarily due to the holders of the Company's subordinated convertible promissory notes due August 2014 conversion of approximately $4.8 million of principal and accrued and unpaid interest outstanding under such notes into shares of common stock, and due to the Company payment of the remaining outstanding principal amount of $4.0 million for the 2011 subordinated convertible promissory notes due March 2014.

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Acquisition Costs, net of Gains— The Company incurred minimal expense for acquisition costs for the three months ended September 30, 2014 as a result of limited acquisition activity. This was a decrease of $0.03 million , compared with the same period in 2013 .      
Derivative Gain —For the three months ended September 30, 2014 , there was no derivative gain or loss compared to the $2.0 million gain for the three months ended September 30, 2013. The derivative is a product of a convertible debt instrument entered into during the third quarter of 2010. The expense associated with the derivative is subject to volatility based on a number of factors including increases or decreases in our stock price. Increases in our stock price generally result in increases in expense. Conversely, a decrease in our stock price generally results in the recognition of a gain in our statements of operations. The expense or gain recognized in a period is based on the fair value of the derivative instrument at the end of the year in comparison to the beginning of the year. The Company amended the debt instruments in October 2013 to eliminate the derivative feature, among other items. Consequently, the fair value of the derivative instrument was eliminated as of October 2013.
Other Expense— The Company recognized approximately $0.4 million of other expense relating to approximately $0.3 million of costs associated with the Company's New Plan and approximately $0.1 million of legal fees associated with on going litigation matters for the three months ended September 30, 2014 compared to the same period in 2013 . 
Income Tax Benefit— The Company recognized an income tax benefit of approximately $0.3 million offset by approximately $0.03 million of state and local income tax expense for the three months ended September 30, 2014 compared to the same period in 2013 .  During the three months ended September 30, 2014, the Company trued up the December 31, 2013 tax provision to match the annual tax returns prepared by an outside third party.
Comparison for the nine months ended September 30, 2014 and 2013

Continuing Operations:
 
The following table sets forth, for the periods indicated, statement of operations items and the amount and percentage of change of these items. The results of operations for any particular period are not necessarily indicative of results for any future period. The following data should be read in conjunction with our consolidated financial statements and the notes thereto, which are included herein. 

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Nine Months Ended September 30,
 
Increase (Decrease)
(Amounts in 000’s)
 
2014
 
2013
 
Amount
 
Percent 
Revenues:
 
 

 
 

 
 

 
 

Patient care revenues
 
$
165,196

 
$
160,471

 
$
4,725

 
3
 %
Management revenues
 
1,140

 
1,529

 
(389
)
 
(25
)%
Rental revenues
 
88

 
—

 
88

 
—
 %
Total revenues
 
166,424

 
162,000

 
4,424

 
3
 %
Expenses:
 
 

 
 

 
 

 
 
Cost of services (exclusive of facility rent, depreciation and amortization)
 
137,743

 
134,392

 
3,351

 
2
 %
General and administrative expenses
 
12,318

 
14,016

 
(1,698
)
 
(12
)%
Audit committee investigation expense
 
—

 
2,284

 
(2,284
)
 
(100
)%
Facility rent expense
 
5,085

 
5,077

 
8

 
—
 %
Depreciation and amortization
 
5,716

 
5,245

 
471

 
9
 %
Salary retirement and continuation costs
 
2,771

 
154

 
2,617

 
1,699
 %
Total expense
 
163,633

 
161,168

 
2,465

 
2
 %
Income from Operations
 
2,791

 
832

 
1,959

 
235
 %
Other Income (Expense):
 
 

 
 

 
 
 
 
Interest expense, net
 
(7,916
)
 
(9,459
)
 
(1,543
)
 
(16
)%
Acquisition costs, net of gains
 
(8
)
 
(610
)
 
(602
)
 
(99
)%
Derivative gain
 
—

 
2,178

 
(2,178
)
 
(100
)%
Loss on extinguishment of debt
 
(1,803
)
 
(33
)
 
1,770

 
5,364
 %
Loss on disposal of assets
 
—

 
(10
)
 
(10
)
 
(100
)%
Other (expense) income
 
(636
)
 
15

 
651

 
4,340
 %
Total other expense, net
 
(10,363
)
 
(7,919
)
 
2,444

 
31
 %
Loss from Continuing Operations Before Income Taxes
 
(7,572
)
 
(7,087
)
 
485

 
7
 %
Income tax benefit (expense)
 
236

 
(24
)
 
260

 
1,083
 %
Loss from Continuing Operations
 
$
(7,336
)
 
$
(7,111
)
 
$
225

 
3
 %
 
Patient Care Revenues —Total patient care revenues increased by $ 4.7 million , or 3% , for the nine months ended September 30, 2014 as compared with the same period in 2013 . The increase was primarily due to a slight increase in the skilled facility occupancy rate from 77.6% to 78.7% and an increase in the skilled facility average Medicare reimbursement rate per patient day from $440.82 to $455.64, or 3.4%.
Management Revenues— Management revenues (net of eliminations) decreased approximately $0.4 million , or 25% , for the nine months ended September 30, 2014 as compared with the same period in 2013 . The decrease is primarily due to the discontinuance of a management agreement effective as of March 1, 2014.
Cost of Services— Cost of services was approximately $137.7 million for the nine months ended September 30, 2014 as compared with the same period in 2013 of approximately $134.4 million. The increase is primarily due to the increase of approximately $0.9 million in pharmacy and therapy expense and approximately $1.2 in nursing expense due to increased skilled patient mix, an increase of approximately $0.8 million in plant operations, an increase of approximately $0.3 million in bed taxes and approximately $0.1 million in regulatory expenses. Cost of services as a percentage of patient care revenue decreased from 83.7% at September 30, 2013 to 83.4% at September 30, 2014 . 
General and Administrative— General and administrative costs decreased by $1.7 million to $ 12.3 million for the nine months ended September 30, 2014 , compared with $ 14.0 million for the same period in 2013 . The decrease is primarily due to the following: (i) decrease in salaries, wages and employee benefits expense of approximately $0.6 million; (ii) decrease of approximately $0.5 million in accounting and auditing expense; (iii) decrease of approximately $0.4 million in contract services and repair and maintenance costs; (iv) decrease of approximately $0.2 million in travel expense; (v) decrease of approximately $0.2 million in recruiting costs, partially offset by an increase of approximately $0.2 million in legal fees expense. As a percentage of total revenue, general and administrative costs declined to 7.4% for the nine months ended September 30, 2014 , compared with 8

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.7% for the same period in 2013 , reflecting the announcement of the New Plan and the progress the Company has made in cost control efforts at the general and administrative level. 
      Audit Committee Investigation Expense— As previously disclosed, the Audit Committee, in consultation with management, concluded in 2013 that: (i) the Company’s previously issued financial statements for the quarters ended March 31, 2012, June 30, 2012 and September 30, 2012 (the “Relevant Financial Statements”) should no longer be relied upon due to errors in the Relevant Financial Statements identified in connection with the audit of the Company’s financial statements for the year ended December 31, 2012; and (ii) the Company would restate the Relevant Financial Statements. The Audit Committee initiated a further review of, and inquiry with respect to, the accounting and financial issues related to these and other potential errors and engaged counsel to assist the Audit Committee with such matters. The Audit Committee completed its inquiry and, in connection therewith, assisted in the correction of certain errors relating to accounting and financial matters and identified certain material weaknesses in the Company’s internal control over financial reporting, including weakness in the Company’s ability to appropriately account for complex or non-routine transactions and in the quality and sufficiency of the Company’s finance and accounting resources. On July 8, 2013, the Company restated the Relevant Financial Statements by filing with the SEC amendments to its Quarterly Reports on Form 10-Q/A for the quarters ended March 31, 2012, June 30, 2012 and September 30, 2012. 
In connection with the restatement process and the Audit Committee’s review and inquiry during 2013, the Company incurred significant professional services costs and other expenses which have been recognized as a special charge totaling approximately $ 2.3 million for the nine months ended September 30, 2013. 
Facility Rent Expense —Facility rent expense was approximately $5.1 million for both of the nine months ended September 30, 2014 and 2013.

Depreciation and Amortization— Depreciation and amortization for the nine months ended September 30, 2014 increased by $ 0.5 million to $5.7 million , compared to $ 5.2 million for the same period in 2013 . During the nine months ended September 30, 2014 , we recognized an impairment charge of $0.2 million to write down the carrying value of a certain 102-bed skilled nursing facility located in Tulsa, Oklahoma. We compared the estimated fair value of the assets to their carrying value and recorded an impairment charge for the excess of carrying value over estimated fair value.
Salary Retirement and Continuation Costs— Salary Retirement and Continuation Costs increased by $2.6 million to $2.8 million for the nine months ended September 30, 2014 , compared with $0.2 million for the same period in 2013 . The Company incurred certain retirement and salary continuation costs related to the announcement of the New Plan of approximately $1.1 million, certain retirement and salary continuation costs related to a separation agreement with a former officer of the Company of approximately $0.9 million, salary continuation costs related to a separation agreement with an officer of the Company of approximately $0.4 million, and approximately $0.4 million related to the amendment to the consulting agreement with the Company's Vice Chairman during the nine months ended September 30, 2014 . During the nine months ended September 30, 2013 , there were no costs related to separation agreements.
Interest Expense, net— Interest expense, net decreased by $ 1.5 million , or 16% , to $ 7.9 million for the nine months ended September 30, 2014 , compared with $ 9.5 million for the same period in 2013. The decrease is primarily due to the decrease of approximately $0.9 million related to the holders of the Company's subordinated convertible promissory notes due August 2014 conversion of approximately $4.8 million of principal and accrued and unpaid interest outstanding under such notes into shares of common stock; decrease of approximately $0.4 million due to the Company's payment of the remaining outstanding principal amount of $4.0 million for the 2011 subordinated convertible promissory notes due March 2014; and the decrease of approximately $0.2 million relating to the repayment of the outstanding bonds on March 3, 2014 at par plus accrued interest in the amount of $3.1 million from funds that were previously deposited into a restricted defeased bonds escrow account.
Acquisition Costs, net of Gains— The Company incurred minimal an expense for acquisition costs for the nine months ended September 30, 2014 as a result of limited acquisition activity. This was a decrease of $ 0.6 million , compared with the same period in 2013 .      
Derivative Gain —For the nine months ended September 30, 2014 , there was no derivative gain compared to $2.2 million for the nine months ended September 30, 2013. The derivative is a product of a convertible debt instrument entered into during the third quarter of 2010. The expense associated with the derivative is subject to volatility based on a number of factors including increases or decreases in our stock price. Increases in our stock price generally result in increases in expense. Conversely, a decrease in our stock price generally results in the recognition of a gain in our statements of operations. The expense or gain recognized in a period is based on the fair value of the derivative instrument at the end of the year in comparison to the beginning of the year. The Company amended the debt instruments in October 2013 to eliminate the derivative feature, among other items. Consequently, the fair value of the derivative instrument was eliminated as of October 2013.

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Loss on Extinguishment of Debt — The Company recognized a $1.8 million loss on extinguishment of debt during the nine months ended September 30, 2014 compared with the same period in 2013 due to the difference between the conversion price and the market price on the date the subordinated convertible promissory notes were converted into shares of common stock.
Other Expense— The Company recognized approximately $0.6 million of other expense relating to approximately $0.3 million of costs associated with the Company's New Plan and approximately $0.3 million of legal fees associated with on going litigation matters for the nine months ended September 30, 2014 compared with the same period in 2013 .
Income Tax Benefit— The Company recognized an income tax benefit of approximately $0.3 million offset by approximately $0.04 million of state and local income tax expense for the nine months ended September 30, 2014 , compared with a minimal income tax expense for the same period in 2013 . During the three months ended September 30, 2014, the Company trued up the December 31, 2013 tax provision to match the annual tax returns prepared by an outside third party.
Liquidity and Capital Resources

For the nine months ended and as of September 30, 2014 , we had a net loss of $8.9 million and negative working capital of $35.0 million . At September 30, 2014 , we had $12.9 million in cash and cash equivalents and $151.3 million in indebtedness, including current maturities and discontinued operations, of which $56.3 million is current debt (including the Company’s outstanding subordinated convertible promissory notes with a principal amount of $7.5 million and $6.5 million that mature in July 2015 and April 2015 , respectively). Our ability to achieve profitable operations is dependent on continued growth in revenue and controlling costs. 
On July 23, 2014, the Company announced that the Board of Directors had approved, and management has begun to implement, a strategic plan (the "New Plan") to transition the Company to a healthcare property holding and leasing company. On October 14, 2014, the Company held a special meeting of shareholders in Atlanta, Georgia, in which the shareholders approved the additional leasing transactions which transactions may constitute the lease of all or substantially all of the Company's property under Georgia law.
The Company's final assessment of liquidity and profitability under the New Plan is dependent on the timing of the leasing and sub-leasing transactions contemplated by the New Plan. However, the Company believes the New Plan, when fully implemented, will enhance cash flow from operations, reduce capital expenditure requirements, and require significantly less working capital.
We estimate that cash flow from operations and other working capital changes under the existing business model will be approximately $8.0 million and cash outlays for capital expenditures, dividends on our Series A Preferred Stock and income taxes will total approximately $3.1 million for the twelve months ending September 30 , 2015. We anticipate that scheduled debt service (excluding approximately $21.0 million of bullet maturities due in February 2015 that the Company believes will be refinanced on a longer term basis and $6.5 million and $7.5 million in outstanding subordinated convertible promissory notes that mature in April 2015 and July 2015 , respectively, but including principal and interest), will total approximately $16.1 million for the twelve months ending September 30 , 2015. We anticipate the conversion to common stock of $6.5 million and $7.5 million of the Company's outstanding subordinated convertible promissory notes that mature in April 2015 and July 2015, respectively. These promissory notes are convertible into shares of common stock of the Company at $4.50 per share and $4.17 per share, respectively. The closing price of the common stock exceeded $4.17 per share from January 1, 2014 through November 7, 2014 and exceeded $4.50 per share from July 23, 2014 through October 9, 2014. As discussed further below, if we were unable to refinance the $21.0 million of bullet maturities due in February 2015, then the Company may be required to restructure its outstanding indebtedness, implement further cost reduction initiatives, or sell assets due to our limited liquidity in such an event.
During February and March 2014, the Company issued 693,761 shares of common stock to holders of the Company's warrants dated September 30, 2010 upon conversion at an exercise price of $3.57 per share. The Company received proceeds of approximately $2.3 million , net of broker commissions of approximately $0.1 million . On March 28, 2014, we received net proceeds of approximately $6.3 million from the issuance and sale of the Company's 10% subordinated convertible promissory notes due April 30, 2015.
We routinely have ongoing discussions with existing and potential new lenders to refinance current debt on a longer term basis and, in recent periods, have refinanced shorter term acquisition debt, including seller notes, with traditional longer term mortgage notes, some of which have been executed under government guaranteed lending programs. We have been successful in recent years in raising new equity capital and believe, based on recent discussions, that these markets will continue to be available to us for raising capital in 2015.

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Based on existing cash balances, anticipated cash flows for the twelve months ending September 30 , 2015, the anticipated refinancing $21.0 million of bullet maturities due February 2015, and the expected conversion of $2.9 million of the Company's outstanding subordinated convertible promissory notes that mature in July 2015 , which excludes subordinated convertible promissory notes with a principal amount in the aggregate of $1.1 million that were converted into shares of common stock of the Company in July and August 2014 (see Note 8 - Notes Payable and Other Debt ), and $6.5 million of subordinated convertible promissory notes due April 2015 , into shares of common stock, we believe there will be sufficient funds for our operations, scheduled debt service, and capital expenditures at least through the next 12 months . On a longer term basis, at September 30 , 2014 we have approximately $36.0 million of debt payments and maturities due between October 2015 and September 2018. We believe our long-term liquidity needs will be satisfied by these same sources, borrowings as required to refinance indebtedness and new sources of equity capital. 
In order to satisfy our capital needs, we will seek to: (i) implement the New Plan and if there are delays in leasing and sub-leasing transactions contemplated by the New Plan, we will continue to improve our operating results by increasing facility occupancy, optimizing our payor mix by increasing the proportion of sub-acute patients within our skilled nursing facilities, and continuing our cost optimization and efficiency strategies; (ii) expand our borrowing arrangements with certain existing lenders; (iii) refinance current debt where possible to obtain more favorable terms; and (iv) raise capital through the issuance of debt or equity securities. We anticipate that these actions, if successful, will provide the opportunity for us to maintain liquidity on a short and long term basis, thereby permitting us to meet our operating and financing obligations for the next 12 months. However, there is no guarantee that such actions will be successful or that anticipated operating results will be achieved. We currently have limited borrowing availability under our existing revolving credit facilities. If the Company is unable to improve operating results, expand existing borrowing agreements, refinance current debt (including $21.0 million of bullet maturities due February 2015), the subordinated convertible promissory notes due July 2015 and April 2015 are not converted into shares of common stock and are required to be repaid by us in cash, then the Company may be required to restructure its outstanding indebtedness, implement further cost reduction initiatives, sell assets, or delay or modify its strategic plan.
Cash Flows
The following table presents selected data from the Company’s consolidated statement of cash flows for the periods presented:
 
 
Nine Months Ended September 30,
(Amounts in 000’s)
 
2014
 
2013
Net cash (used in) provided by operating activities - continuing operations
 
$
(4,674
)
 
$
3,181

Net cash used in operating activities - discontinued operations
 
(1,441
)
 
(493
)
Net cash provided by (used in) investing activities - continuing operations
 
2,365

 
(5,441
)
Net cash (used in) provided by investing activities - discontinued operations
 
(778
)
 
886

Net cash flows (used in) provided by financing activities - continuing operations
 
(1,938
)
 
827

Net cash flows used in financing activities - discontinued operations
 
(41
)
 
(2,173
)
Net change in cash and cash equivalents
 
(6,507
)
 
(3,213
)
Cash and cash equivalents at beginning of period
 
19,374

 
15,937

Cash and cash equivalents at end of period
 
$
12,867

 
$
12,724

 
Nine Months Ended September 30, 2014
 
Net cash used in operating activities - continuing operations for the nine months ended September 30, 2014 was approximately $ 4.7 million , consisting primarily of the Company’s loss from operations, and changes in working capital, consisting of decreased accounts payable and accrued expenses of $3.1 million, increased accounts receivable of $5.4 million and increased prepaid expenses and other of $1.7 million. 
Net cash provided by investing activities—continuing operations for the nine months ended September 30, 2014 , was approximately $ 2.4 million . This is primarily the result of a decrease in restricted cash and investments, offset by capital expenditures.
Net cash used in financing activities—continuing operations was approximately $ 1.9 million for the nine months ended September 30, 2014 . This is primarily the result of proceeds received of $14.5 million from debt refinancings, $6.0 million under the 2014 Convertible Notes, $3.3 million under the Company’s insurance premium financing and $3.1 million received from the

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exercise of warrants and options, offset by repayment of $18.5 million on notes payable, repayment of $3.0 million on bonds payable, repayment of $4.0 million of subordinated convertible promissory notes, payment of $1.9 million in preferred stock dividends, and changes in the line of credit and debt issuance costs of $1.3 million.
Nine Months Ended September 30, 2013
 
Net cash provided by operating activities—continuing operations for the nine months ended September 30, 2013 , was $ 3.2 million , consisting primarily of the Company’s loss from operations, and changes in working capital, including increased accounts payable and accrued expenses of $4.7 million, increased accounts receivable $3.2 million, and increased prepaid expenses and other of $1.0 million. 
Net cash used in investing activities—continuing operations for the nine months ended September 30, 2013 , was approximately $ 5.4 million . This is primarily the result of proceeds received of $3.2 million from notes receivable, offset by capital expenditures and the increase in restricted cash and investments and escrow deposits for acquisitions. The net cash provided by investing activities—discontinued operations was approximately  $0.9 million for the nine months ended September 30, 2013, related to proceeds from the sale of two additional assisted living facilities.
Net cash provided by financing activities—continuing operations was approximately $ 0.8 million for the nine months ended September 30, 2013 .  This is primarily the result of proceeds received under the Company's lines of credit and insurance premium financing, offset by repayment on notes payable, debt issuance costs and payment of the preferred stock dividend. Net cash used in financing activities—discontinued operations was approximately $2.2 million consisting of repayment of existing debt obligations related to the sale of the Lincoln Lodge Retirement Residence facility.
Notes Payable and Other Debt  

Total notes payable and other debt obligations as of September 30, 2014 and December 31, 2013 were as follows: 
(Amounts in 000’s)
 
September 30, 2014
 
December 31, 2013
Revolving credit facilities and lines of credit (a)
 
$
8,213

 
$
8,503

Senior debt - guaranteed by HUD
 
18,469

 
4,063

Senior debt - guaranteed by USDA
 
27,296

 
27,763

Senior debt - guaranteed by SBA
 
5,774

 
5,954

Senior debt - bonds, net of discount (b)
 
12,961

 
16,102

Senior debt - other mortgage indebtedness (c)
 
63,390

 
78,408

Other debt
 
1,151

 
625

Convertible debt issued in 2010, net of discount
 
—

 
6,930

Convertible debt issued in 2011
 
—

 
4,459

Convertible debt issued in 2012
 
7,500

 
7,500

Convertible debt issued in 2014
 
6,500

 
—

Total
 
$
151,254

 
$
160,307

Less: current portion
 
45,143

 
26,154

Less: portion included in liabilities of disposal group held for sale (a),(c)
 
5,197

 
—

Less: portion included in liabilities of variable interest entity held for sale (b)
 
$
5,954

 
$
6,034

Notes payable and other debt, net of current portion
 
$
94,960

 
$
128,119


(a)  The revolving credit facilities and lines of credit includes $0.2 million related to the outstanding loan entered into in conjunction with the acquisition of the Companions skilled nursing facility in August 2012.
(b)  The senior debt - bonds, net of discount includes $6.0 million at both September 30, 2014 and December 31, 2013 related to the Company's consolidated variable interest entity, Riverchase Village ADK, LLC, revenue bonds, in two series, issued by the Medical Clinical Board of the City of Hoover in the State of Alabama, which the Company has guaranteed the obligation under such bonds.
(c)  The senior debt-other mortgage indebtedness includes $5.0 million related to the outstanding loan entered into in conjunction with the acquisition of Companions in August 2012.


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Scheduled Maturities
 
The schedule below summarizes the scheduled maturities as of September 30, 2014 for each of the next five years and thereafter. The 2015 maturities include $0.2 million and $5.0 million, respectively, related to the Companions Specialized Care Center's outstanding loans classified as liabilities of disposal group held for sale and $6.0 million related to the Riverchase bonds classified as liabilities of a variable interest entity held for sale at September 30, 2014 .

 
(Amounts in 000’s)
2015
$
56,470

2016
17,865

2017
14,262

2018
3,920

2019
1,989

Thereafter
57,147

Subtotal
151,653

Less: unamortized discounts ($190 classified as current)
(399
)
Total notes and other debt
$
151,254


Debt Covenant Compliance
 
As of September 30, 2014 , the Company (including its consolidated variable interest entity) has approximately 37 credit related instruments (credit facilities, mortgage notes, bonds and other credit obligations) outstanding that include various financial and administrative covenant requirements. Covenant requirements include, but are not limited to, fixed charge coverage ratios, debt service coverage ratios, minimum EBITDA or EBITDAR, current ratios and tangible net worth requirements. Certain financial covenant requirements are based on consolidated financial measurements whereas others are based on measurements at the subsidiary level (i.e.; facility, multiple facilities or a combination of subsidiaries comprising less than the Company’s consolidated financial measurements). Some covenants are based on annual financial metric measurements whereas others are based on quarterly financial metric measurements. The Company routinely tracks and monitors its compliance with its covenant requirements. In recent periods, including as of September 30, 2014 , the Company has not been in compliance with certain financial and administrative covenants. For each instance of such non-compliance, the Company has obtained waivers or amendments to such requirements including as necessary modifications to future covenant requirements or the elimination of certain requirements in future periods. 
The following table includes financial covenant requirements as of the last measurement date as of or prior to September 30, 2014 in instances where the Company was not in compliance with the financial covenant or it achieved compliance with the covenant requirement by a margin of 10% or less. The table also identifies the related credit facility, outstanding balance at September 30, 2014 and the next applicable future financial covenant requirement inclusive of adjustments to covenant requirements resulting from amendments executed subsequent to September 30, 2014 . 
Credit Facility
Balance at Sept 30, 
 2014 
 (000's)
Consolidated or
Subsidiary Level
Covenant
Requirement
Financial Covenant
Measurement
Period
Min/Max
Financial
Covenant
Required
Financial
Covenant
Metric
Achieved
 
Future
Financial
Covenant
Metric
Required
Gemino Lines of Credit
$
2,801

Consolidated
Fixed Charge Coverage Ratio (FCCR)
Quarterly
1.10

1.18

 
1.10

Contemporary Healthcare Capital - Term Note and Line of Credit - CSCC Nursing, LLC
$
5,000

Subsidiary
DSCR
Quarterly
1.15

0.73

*
1.15

$
197

Subsidiary
Minimum Occupancy
Quarterly
70
%
67
%
*
70
%
PrivateBank - Mortgage Note - Valley River Nursing, LLC; Park Heritage Nursing, LLC; Benton Nursing, LLC
$
11,068

Subsidiary
Minimum EBITDAR
Quarterly
$
450

$
413

*
$
450

 
Subsidiary
Fixed Charge Coverage Ratio (FCCR)
Quarterly
1.05

0.92

*
1.05

* Waiver or amendment for violation of covenant obtained.

Revolving Credit Facilities and Lines of Credit

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Gemino Northwest Credit Facility

On May 30, 2013, NW 61st Nursing, LLC (“Northwest”), a wholly-owned subsidiary of the Company, entered into a Credit Agreement (the “Northwest Credit Facility”) with Gemino Healthcare Finance, LLC ("Gemino").
On February 10, 2014, Northwest entered into a letter agreement with Gemino which modified the: (i) Northwest Credit Facility; and (ii) Gemino-Bonterra Credit Facility (described below). The Waiver and Amendment, among other things, adjusted the required: (a) minimum fixed charge coverage ratio; (b) maximum loan turn days; (c) minimum earnings before interest, taxes, depreciation and amortization; and (d) waived certain specified defaults in existence as of the date of the Waiver and Amendment.
As of September 30, 2014 , $1.5 million was outstanding of the maximum borrowing amount of $1.5 million under the Northwest Credit Facility.
Gemino-Bonterra Credit Facility
On September 20, 2012, ADK Bonterra/Parkview, LLC ("Bonterra"), a wholly owned subsidiary of the Company entered into a Second Amendment to the Credit Agreement with Gemino ("Gemino-Bonterra Credit Facility"), which amended the original Credit Agreement dated April 27, 2011 between Bonterra and Gemino.
On February 10, 2014, Bonterra entered into a letter agreement with Gemino which modified the: (i) Northwest Credit Facility (described above); and (ii) Gemino-Bonterra Credit Facility. The Waiver and Amendment, among other things, adjusted the required: (a) minimum fixed charge coverage ratio; (b) maximum loan turn days; (c) minimum earnings before interest, taxes, depreciation and amortization; and (d) waived certain specified defaults in existence as of the date of the Waiver and Amendment.
As of September 30, 2014 , $1.3 million was outstanding of the maximum borrowing amount of $2.0 million under the Gemino-Bonterra Credit Facility.
PrivateBank Credit Facility

On July 24, 2014, certain wholly-owned subsidiaries of the Company entered into a Fifth Modification Agreement with the PrivateBank and Trust Company ("PrivateBank"), effective July 22, 2014, which modified that certain Loan Agreement, dated September 20, 2012, as amended, the PrivateBank Credit Facility. The modification, among other things: (i) increased the letter of credit amount available under the PrivateBank Credit Facility from $3.5 million to $3.8 million ; and (ii) amended certain financial terms under the PrivateBank Credit Facility regarding debt service and interest charges.
On September 24, 2014, certain wholly-owned subsidiaries of the Company entered into a Sixth Modification Agreement with PrivateBank, which modified that certain Loan Agreement, dated September 20, 2012, as amended, the PrivateBank Credit Facility. Pursuant to the modification: (i) the outstanding amount owing under the PrivateBank Credit Facility was reduced from $10.6 million to $9.1 million ; (ii) three of the Company's subsidiaries and their collateral were released from their obligations under the PrivateBank Credit Facility because one of the entities no longer operates a skilled nursing facility and each of the two remaining released entities have entered into new financing arrangements with the United States Department of Housing and Urban Development ("HUD"), as discussed below; and (iii) amended certain financial terms under the PrivateBank Credit Facility regarding minimum fixed charge coverage ratio.

As of September 30, 2014 , $4.1 million was outstanding of the maximum borrowing amount of $9.1 million under the
PrivateBank Credit Facility, subject to borrowing base limitations. As of September 30, 2014 , the Company has $3.8 million of
outstanding letters of credit relating to this credit facility.

PrivateBank-Woodland Nursing and Glenvue Nursing Credit Facility

On September 24, 2014, certain wholly-owned subsidiaries of the Company entered into a Loan and Security Agreement (the “Woodland Nursing and Glenvue Nursing Credit Facility”) with PrivateBank. The Woodland Nursing and Glenvue Nursing Credit Facility provides for a $1.5 million principal amount senior secured revolving credit facility.

The Woodland Nursing and Glenvue Nursing Credit Facility matures on September 24, 2017. Interest on the Woodland Nursing and Glenvue Nursing Credit Facility accrues on the principal balance thereof at a rate of interest equal to the greater of: (i) a floating per annum rate of interest equal to the prime rate plus 1.0%; or (ii) 5.0% per annum. The Woodland Nursing and Glenvue Nursing shall also pay to PrivateBank: (i) a one time non-refundable loan fee in the amount of $11,250; and (ii) a fee

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equal to 0.5% per annum of the unused portion of the Woodland Nursing and Glenvue Nursing Credit Facility. The Woodland Nursing and Glenvue Nursing Credit Facility is secured by a security interest in, without limitation, the accounts receivable and the collections and proceeds thereof relating to the Company’s two skilled nursing facilities located in Springfield, Ohio known as the Eaglewood Care Center and located in Glennville, Georgia known as the Glenview Health and Rehabilitation Center. The Company has unconditionally guaranteed all amounts owing under the Woodland Nursing and Glenvue Nursing Credit Facility.
The Woodland Nursing and Glenvue Nursing Credit Facility contains customary events of default, including material breach of representations and warranties, failure to make required payments, failure to comply with certain agreements or covenants and certain events of bankruptcy and insolvency. Upon the occurrence of an event of default, PrivateBank may terminate the Woodland Nursing and Glenvue Nursing Credit Facility.

As of September 30, 2014 , $1.1 million was outstanding of the maximum borrowing amount of $1.5 million under the
Woodland Nursing and Glenvue Nursing Credit Facility, subject to borrowing base limitations.

Senior Debt—Guaranteed by HUD
Woodland Credit Facility
On September 24, 2014, a wholly owned subsidiary of the Company, entered into a Mortgage and Deed of Trust Agreement (the “Woodland Credit Facility”), with Housing & Healthcare Finance, LLC (“H&H”) in connection with the refinancing of the skilled nursing facility known as Eaglewood Care Center ("Eaglewood"). The Woodland Credit Facility provides for a $5.7 million principal amount secured credit facility.
The proceeds from the Woodland Credit Facility were used to pay off an existing credit facility with PrivateBank with respect to the Eaglewood facility in the amount of $4.5 million and the Company received net proceeds of $0.6 million for working capital purposes.
The Woodland Credit Facility matures on October 1, 2044. Interest on the Woodland Credit Facility accrues on the principal balance thereof at an annual rate of 3.75%. The Woodland Credit Facility is secured by, among other things, an assignment of all rents paid under any existing or future leases and rental agreements with respect to the Woodland Credit Facility. HUD has insured all amounts owing under the Woodland Credit Facility. The Woodland Credit Facility contains customary events of default, including fraud or material misrepresentations or material omission, the commencement of a forfeiture action or proceeding, failure to make required payments, failure to perform or comply with certain agreements and certain events of bankruptcy and insolvency. Upon the occurrence of certain events of default, H&H may, after receiving the prior written approval of HUD, terminate the Woodland Credit Facility and all amounts under the Woodland Credit Facility will become immediately due and payable.
In connection with entering into the Woodland Credit Facility, Woodland entered into a healthcare regulatory agreement and a promissory note, each containing customary terms and conditions.
Glenvue Credit Facility
On September 24, 2014, a wholly owned subsidiary of the Company, entered into a Mortgage and Deed of Trust Agreement (the “Glenvue Credit Facility”), with H&H in connection with the refinancing of the skilled nursing facility known as Glenvue Health and Rehabilitation ("Glenvue"). The Glenvue Credit Facility provides for an $8.8 million principal amount secured credit facility.
The proceeds from the Glenvue Credit Facility were used to pay off an existing credit facility with PrivateBank with respect to the Glenvue facility in the amount of $6.4 million and the Company received net proceeds of $1.8 million for working capital purposes.
The Glenvue Credit Facility matures on October 1, 2044. Interest on the Glenvue Credit Facility accrues on the principal balance thereof at an annual rate of 3.75%. The Glenvue Credit Facility is secured by, among other things, an assignment of all rents paid under any existing or future leases and rental agreements with respect to the Glenvue Credit Facility. HUD has insured all amounts owing under the Glenvue Credit Facility.
The Glenvue Credit Facility contains customary events of default, including fraud or material misrepresentations or material omission, the commencement of a forfeiture action or proceeding, failure to make required payments, failure to perform or comply with certain agreements and certain events of bankruptcy and insolvency. Upon the occurrence of certain events of default, H&H may, after receiving the prior written approval of HUD, terminate the Glenvue Credit Facility and all amounts under

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the Glenvue Credit Facility will become immediately due and payable.In connection with entering into the Glenvue Credit Facility, Glenvue entered into a healthcare regulatory agreement and a promissory note, each containing customary terms and conditions.
Senior Debt—Bonds, net of Discount
Quail Creek
In July 2012, a wholly owned subsidiary of AdCare financed the purchase of a skilled nursing facility located in Oklahoma City, Oklahoma known as Quail Creek Nursing & Rehabilitation Center by the assumption of existing indebtedness under that certain Loan Agreement and Indenture of First Mortgage with The Bank of New York Mellon Global Corporate Trust, as assignee of The Liberty National Bank and Trust of that certain Bond Indenture, dated September 1, 1986, as amended as of September 1, 2001. The indebtedness under the Loan Agreement and Indenture consisted of a principal amount of $2.8 million . In July of 2012, the purchase price allocation of fair value totaling $3.2 million was assigned to this indebtedness resulting in a $0.4 million premium that was amortized to maturity. The loan was scheduled to mature in August 2016 and accrued interest at a fixed rate of 10.25% per annum. The loan was secured by the Quail Creek Nursing & Rehabilitation Center. On September 27, 2013, the outstanding principal and accrued interest to the prepayment date in the amount of $3.1 million was deposited into a restricted defeased bonds escrow account.
Pursuant to the loan agreement and indenture, the outstanding bonds were prepaid on March 3, 2014 at par plus accrued interest in the amount of $3.1 million from the funds that were previously deposited into a restricted defeased bonds escrow account.
Senior Debt - Other Mortgage Indebtedness
Northridge, Woodland Hills and Abington
On March 28, 2014, the Company entered into a Fourth Amendment to the Secured Loan Agreement and Payment Guaranty with KeyBank National Association ("KeyBank"), which amended the Secured Loan Agreement between the Company and KeyBank (the "KeyBank Credit Facility"). Pursuant to the amendment, among other things: (i) KeyBank waived the failure of certain financial covenants of such subsidiaries regarding fixed charge coverage ratio, implied debt service coverage, and compliance of making a certain sinking fund payment due on March 1, 2014 such that no default or events of default under the KeyBank Credit Facility occurred due to such failure; (ii) modified and amended certain financial covenants regarding the Company’s fixed charge ratio and implied debt service coverage, and (iii) paid down $3.4 million of loan principal from the release of $3.4 million from a certain collateral account.
As of September 30, 2014 , $12.0 million was outstanding under the KeyBank Credit Facility. The Company has $2.0 million of restricted assets related to this loan.
Glenvue

On July 17, 2014, a certain wholly-owned subsidiary of the Company entered into a Modification Agreement with PrivateBank, effective July 2, 2014, which modified that certain Loan Agreement, dated July 2, 2012, as amended, PrivateBank Loan Agreement. The modification, among other things: (i) extended the maturity date of the PrivateBank Loan Agreement from July 2, 2014 to January 2, 2015; and (ii) amended certain financial terms under the PrivateBank Loan Agreement regarding debt service and interest charges.
On September 24, 2014, the PrivateBank Loan Agreement in the outstanding principal amount of $6.4 million was repaid by the proceeds from the Glenvue Credit Facility, noted above, and the Company received net proceeds of $1.8 million for working capital purposes.
Woodland Manor
On September 24, 2014, that certain Loan Agreement, dated December 30, 2011, with PrivateBank in the outstanding principal amount of $4.5 million was repaid by the proceeds from the Woodland Credit Facility, noted above, and the Company received net proceeds of $0.6 million for working capital purposes.
Convertible Debt
 
Subordinated Convertible Promissory Notes Issued in 2010   (the "2010 Notes")


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During the nine months ended September 30, 2014 , holders of the Company's subordinated convertible promissory notes due August 2014 converted approximately $6.9 million of principal and accrued and unpaid interest outstanding under such notes into shares of common stock at a price of $3.73 per share. The Company recognized a $1.8 million loss on extinguishment of debt during the nine months ended September 30, 2014 related to the difference between the conversion price and the market price on the date the subordinated convertible promissory notes were converted into shares of common stock. The schedule below summarizes the note conversions and number of shares of common stock issued for each conversion since inception:

Date of conversion
 
 Conversion Price
 
Shares of Common Stock Issued
 
Debt and Interest Converted
2011:
 
 
 
 
 
 
July
 
$
4.13

 
18,160

 
$
75,000

November
 
$
3.92

 
19,132

 
$
75,000

Subtotal
 
 
 
37,292

 
$
150,000

2013:
 
 
 
 
 
 
February
 
$
3.73

 
6,635

 
$
24,749

March
 
$
3.73

 
6,635

 
$
24,749

April
 
$
3.73

 
67,024

 
$
250,000

August
 
$
3.73

 
284,878

 
$
1,062,595

September
 
$
3.73

 
246,264

 
$
918,553

October
 
$
3.73

 
448,215

 
$
1,671,840

November
 
$
3.73

 
136,402

 
$
508,778

December
 
$
3.73

 
82,326

 
$
307,067

Subtotal
 
 
 
1,278,379

 
$
4,768,331

2014:
 
 
 
 
 
 
January
 
$
3.73

 
788,828

 
2,942,328

July
 
$
3.73

 
26,810

 
100,000

August
 
$
3.73

 
1,045,575

 
3,900,000

Subtotal
 
 
 
1,861,213

 
6,942,328

   Total
 
 
 
3,176,884

 
11,860,659


Subordinated Convertible Promissory Notes Issued in 2011 (the "2011 Notes")   

On March 28, 2014, certain holders of the 2011 Notes with an aggregate principal amount of $0.4 million surrendered and cancelled such 2011 Notes in payment for 2014 Notes (as discussed and defined below) with an equal principal amount. On March 31, 2014, the Company repaid the remaining outstanding principal amount of $4.0 million for the 2011 Notes plus all interest accrued and unpaid under the 2011 Notes (including those 2011 Notes surrendered and cancelled in payment for 2014 Notes).
Subordinated Convertible Promissory Notes Issued in 2014   (the "2014 Notes")

The Company entered into Subscription Agreements with certain accredited investors pursuant to which the Company issued and sold, on March 28, 2014 an aggregate of $6.5 million in principal amount of the 2014 Notes. The 2014 Notes bear interest at 10.0% per annum and such interest is payable quarterly in cash in arrears beginning on June 30, 2014. The 2014 Notes mature on April 30, 2015. The 2014 Notes are unsecured and subordinated in right of payment to existing and future senior indebtedness of the Company.
At any time on or after the date of issuance of the 2014 Notes, the 2014 Notes are convertible at the option of the holder into shares of the common stock at an initial conversion price equal to $4.50 per share, subject to adjustment for stock dividends, stock splits, combination of shares, recapitalization and other similar events.

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The Company may prepay at any time, without penalty, upon 60 days prior notice, any portion of the outstanding principal amount and accrued and unpaid interest thereon with respect to any 2014 Note; provided, however, that: (i) the shares of common stock issuable upon conversion of any 2014 Note which is to be so prepaid must be: (a) registered for resale under the Securities Act; or (b) otherwise sellable under Rule 144 of the Securities Act without volume limitations thereunder; and (ii) at any time after the issue date of the 2014 Notes, the volume-weighted average price of the common stock for ten consecutive trading days has equaled or exceeded 105% of the then-current conversion price.
In addition, the holders holding a majority of the outstanding principal amount with respect to all the 2014 Notes may require the Company to redeem all or any portion of the 2014 Notes upon a change of control at a redemption price equal to the outstanding principal amount to be redeemed plus all accrued and unpaid interest thereon. Furthermore, upon a change of control, the Company may redeem all or any portion of the 2014 Notes for a redemption price equal to the outstanding principal amount to be redeemed plus all accrued and unpaid interest thereon.
Park City Capital Offshore Master, Ltd. ("Park City Offshore"), an affiliate of Michael J. Fox, entered into a Subscription Agreement with the Company pursuant to which the Company issued $1.0 million in principal amount of the 2014 Notes. Mr. Fox is a director of Park City Offshore and a director of the Company and beneficial owner of greater than 5% of the outstanding common stock. The 2014 Note was offered to and sold to Park City Offshore on the same terms and conditions as all other buyers in the offering.
Other Debt
 
During the nine months ended September 30, 2014 , the Company obtained financing from AON Premium Finance, LLC and entered into Commercial Insurance Premium Finance Security Agreements for several insurance programs, including general and professional liability, property, casualty, crime, and employment practices liability effective January 1, 2014 and maturing on December 31, 2014. The total amount financed was approximately $3.3 million requiring monthly payments of $0.3 million with interest ranging from 2.87% to 4.79% . At September 30, 2014 , the outstanding amount was approximately $1.2 million .
Receivables
 
The Company’s operations could be adversely affected if we experience significant delays in reimbursement from Medicare, Medicaid or other third-party revenue sources. The Company’s future liquidity will continue to be dependent upon the relative amounts of current assets (principally cash and patient accounts receivable) and current liabilities (principally accounts payable and accrued expenses). In that regard, accounts receivable can have a significant impact on our liquidity. Continued efforts by governmental and third-party payors to contain or reduce the acceleration of costs by monitoring reimbursement rates, by increasing medical review of bills for services, or by negotiating reduced contract rates, as well as any delay by the staff at our facilities in the processing of our invoices, could adversely affect our liquidity and results of operations. 
Accounts receivable attributable to patient services of continuing operations totaled $28.5 million at September 30, 2014 , compared to $26.3 million at December 31, 2013 , representing approximately 46 and 41  days of revenue in accounts receivable as of September 30, 2014 and December 31, 2013 , respectively.
The allowance for bad debt was $6.2 million and $5.0 million at September 30, 2014 and December 31, 2013 , respectively. The Company continually evaluates the adequacy of its bad debt reserves based on patient mix trends, aging of older balances, payment terms and delays with regard to third-party payors, as well as other factors. The Company continues to evaluate and implement additional processes to strengthen our collection efforts and reduce the incidence of uncollectible accounts.
Inflation
     The Company has historically derived a substantial portion of our revenue from the Medicare program. The Company also derives revenue from state Medicaid and similar reimbursement programs. Payments under these programs generally provide for reimbursement levels that are adjusted for inflation annually based upon the state’s fiscal year for the Medicaid programs and in each October for the Medicare program. These adjustments may not continue in the future, and even if received, such adjustments may not reflect the actual increase in our costs for providing healthcare services. 
Labor and supply expenses make up a substantial portion of our cost of services. Those expenses can be subject to increase in periods of rising inflation and when labor shortages occur in the marketplace. To date, the Company has generally been able to implement cost control measures or obtain increases in reimbursement sufficient to offset increases in these expenses. The Company may not be successful in offsetting future cost increases.
Off-Balance Sheet Arrangements

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There were $3.8 million and $2.8 million of outstanding letters of credit at September 30, 2014 and December 31, 2013, respectively, that are pledged as collateral of borrowing capacity on the Loan and Security Agreement with The PrivateBank (the "PrivateBank Credit Facility"). The PrivateBank Credit Facility provides a $9.1 million senior secured revolving credit facility for through September 20, 2015 with the borrowings thereunder subject to a borrowing base and offset by the outstanding letters of credit.
Contractual Obligations - Operating Leases
 
The Company leases certain office space and nine skilled nursing facilities under non-cancelable operating leases, most of which have initial lease terms of ten to twelve years with rent escalation clauses and provisions for payments by the Company of real estate taxes, insurance and maintenance costs. For the three months ended September 30, 2014 and 2013, facility rent expense totaled $1.7 million and $1.7 million , respectively. For the nine months ended September 30, 2014 and 2013 , facility rent expense totaled $ 5.1 million and $ 5.1 million , respectively. 
Five of the Company’s facilities are operated under a single master indivisible lease arrangement. The lease has a term of ten years terminating in 2020. Under the master lease, a breach at a single facility could subject one or more of the other facilities covered by the same master lease to the same default risk. Failure to comply with regulations or governmental authorities, such as Medicare and Medicaid provider requirements, is a default under the Company’s master lease agreement. In addition, other potential defaults related to an individual facility may cause a default of the entire master lease agreement. With an indivisible lease, it is difficult to restructure the composition of the portfolio or economic terms of the lease without the consent of the landlord. The Company is not aware of any defaults as of September 30, 2014 . 
Two of the Company’s facilities are operated under a separate lease agreement. The lease is a single indivisible lease; therefore, a breach at a single facility could subject the second facility to the same default risk. The lease has a term of 12 years into 2022 and includes covenants and restrictions. A covenant is included that requires minimum capital expenditures of $375 per licensed bed per lease year at each facility which amounts to $0.1 million per year for both facilities. The Company has been in compliance with financial and administrative covenants of this lease agreement during the three months ended September 30, 2014 .
On July 1, 2014, a certain wholly-owned subsidiary of the Company entered into an agreement to sublease one of its skilled nursing and rehabilitation facilities located in south Georgia to a local nursing home operator. The sublease has a term of six years ending 2020.
On September 22, 2014, as part of its ongoing strategic plan to transition from an owner and operator of healthcare facilities to a healthcare property holding and leasing company, two certain wholly-owned subsidiaries of the Company entered into an agreement to lease two of its skilled nursing and rehabilitation facilities in Alabama to a local nursing home operator effective November 1, 2014. Under the terms of the triple net lease agreements, the lessee will be responsible for day-to-day management, ongoing maintenance and facility improvements. The leases have a term of five years and may be extended for one separate renewal term of five years.
Adjusted EBITDA from continuing operations and Adjusted EBITDAR from continuing operations
 
Due to the material amount of non-cash related items included in the Company’s results of operations, the Company has developed an Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (“Adjusted EBITDA from continuing operations”)  metric which provides management with a clearer view of operational use of cash (see the table below). The Adjusted EBITDA from continuing operations for the three months ended September 30, 2014 was $6.5 million compared with $5.4 million for the three months ended September 30, 2013 . The Adjusted EBITDA from continuing operations for the nine months ended September 30, 2014 was $ 12.3 million compared $ 9.3 million for the nine months ended September 30, 2013 . The Company has also developed an Adjusted Earnings Before Interest, Taxes, Depreciation, Amortization and Rent (“Adjusted EBITDAR from continuing operations”) metric that is used primarily in some debt covenants of the Company’s loans. 
“Adjusted EBITDA from continuing operations” and “Adjusted EBITDAR from continuing operations” are measures of operating performance that are not calculated in accordance with GAAP. The Company defines: (i) “Adjusted EBITDA from continuing operations” as net income (loss) from continuing operations before interest expense, income tax expense, depreciation and amortization (including amortization of non-cash stock-based compensation), acquisition costs (net of gains), loss on extinguishment of debt, derivative loss or gain, and other non-routine adjustments; and (ii) “Adjusted EBITDAR from continuing operations” as net income (loss) from continuing operations before interest expense; income tax expense, depreciation and amortization (including amortization of non-cash stock-based compensation), acquisition costs (net of gains), loss on

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extinguishment of debt, derivative loss, rent, and other non-routine adjustments.  The Company has provided below supplemental financial disclosure for these measures, including the most directly comparable GAAP measure (Net Loss) and an associated reconciliation.
The following table provides reconciliation of reported Net Loss on a GAAP basis to Adjusted EBITDA from continuing operations and EBITDAR from continuing operations for the three and nine months ended September 30, 2014 and 2013 :
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in 000’s)
 
2014
 
2013
 
2014
 
2013
Condensed Consolidated Statement of Operations Data:
 
 

 
 

 
 

 
 

Net loss
 
$
(3,549
)
 
$
(413
)
 
$
(8,867
)
 
$
(10,109
)
Discontinued operations
 
690

 
696

 
1,531

 
2,998

Net (loss) income from continuing operations (Per GAAP)
 
(2,859
)
 
283

 
(7,336
)
 
(7,111
)
Add back:
 
 

 
 

 
 

 
 

Interest expense, net
 
2,644

 
3,204

 
7,916

 
9,459

Income tax (benefit) expense
 
(244
)
 
(54
)
 
(236
)
 
24

Amortization of stock based compensation
 
244

 
186

 
983

 
737

Depreciation and amortization
 
1,906

 
1,779

 
5,716

 
5,245

Acquisition costs, net of gain
 
8

 
33

 
8

 
610

Loss on extinguishment of debt
 
1,220

 
6

 
1,803

 
33

Derivative gain
 
—

 
(1,989
)
 
—

 
(2,178
)
Loss on disposal of assets
 
—

 
6

 
—

 
10

Audit committee investigation expense
 
—

 
302

 
—

 
2,284

Salary retirement and continuation costs
 
1,489

 
5

 
2,771

 
154

Other expenses (income)
 
444

 
(15
)
 
636

 
(15
)
Adjusted EBITDA from continuing operations
 
4,852

 
3,746

 
12,261

 
9,252

Facility rent expense
 
1,695

 
1,702

 
5,085

 
5,077

Adjusted EBITDAR from continuing operations
 
$
6,547

 
$
5,448

 
$
17,346

 
$
14,329

 
Adjusted EBITDA from continuing operations and Adjusted EBITDAR from continuing operations should not be considered in isolation or as a substitute for net income, income from operations or cash flows provided by, or used in, operations as determined in accordance with GAAP.  Adjusted EBITDA from continuing operations and Adjusted EBITDAR from continuing operations are used by management to focus on operating performance and management without mixing in items of income and expense that relate to the financing and capitalization of the business, fixed rent or lease payments of facilities, derivative loss or gain, certain acquisition related charges and other non-routine adjustments. 
The Company believes these measures are useful to investors in evaluating the Company’s performance, results of operations and financial position for the following reasons: 
•
They are helpful in identifying trends in the Company’s day-to-day performance because the items excluded have little or no significance to the Company’s day-to-day operations;
•
They provide an assessment of controllable expenses and afford management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieve optimal financial performance; and
•
They provide data that assists management determine whether or not adjustments to current spending decisions are needed.
 
AdCare believes that the use of the measures provides a meaningful and consistent comparison of the Company’s underlying business between periods by eliminating certain items required by GAAP, which have little or no significance in the Company’s day-to-day operations. 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk.
 

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Disclosure in response to Item 3. of Form 10-Q is not required to be provided by smaller reporting companies.

Item 4.  Controls and Procedures.
 
Evaluation of Disclosure Controls and Procedures
    
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Accounting Officer (our principal financial officer), as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Accounting Officer (our principal financial officer), has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report (the "Evaluation Date"). Based on such evaluation, our Chief Executive Officer and Chief Accounting Officer (our principal financial officer) have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting  

There were no changes in the Company's internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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Part II.  Other Information

Item 1.  Legal Proceedings.
 
There are no material developments other than disclosed as previously reported in: (i) the section entitled "Note to Consolidated Financial Statements - Note 16. Commitments and Contingencies" and "Note to Consolidated Financial Statements - Note 20. Subsequent Events of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013; and (ii) the section entitled "notes to Consolidated Financial Statements - Note 14 Commitments and Contingencies" of the Company's Quarterly Report on Form 10-Q for the three months ended June 30, 2014.
Item 1A.  Risk Factors.
 
Disclosure in response to Item 1A of Form 10-Q is not required to be provided by smaller reporting companies.
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.
     
None.

Item 3.  Defaults upon Senior Securities.
 
None. 

Item 4.  Mine Safety Disclosures.
 
Not applicable.

Item 5.  Other Information.

None. 

Item 6.  Exhibits.
 
The agreements included as exhibits to this Quarterly Report are included to provide information regarding the terms of these agreements and are not intended to provide any other factual or disclosure information about the Company, its business or the other parties to these agreements. These agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and: 
•
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; 
•
have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
•
may apply standards of materiality in a way that is different from what may be viewed as material to investors; and
•
were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.
 
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time, and should not be relied upon by investors. 

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EXHIBIT INDEX
 
Exhibit No.
 
Description
 
Method of Filing
 
 
 
 
 
3.1
 
Declaration of Conversion of AdCare Health Systems, Inc., an Ohio corporation, to AdCare Health Systems, Inc., a Georgia corporation
 
Incorporated by reference to Appendix A of the Registrant’s Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on October 29, 2013
3.2
 
Certificate of Conversion of AdCare Health Systems, Inc.
 
Incorporated by reference to Exhibit 3.2 of the Registrant’s Current Report on Form 8-K filed on December 18, 2013
3.3
 
Certificate for Conversion for Entities Converting Within or Off the Records of the Ohio Secretary of State
 
Incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on December 18, 2013
3.4
 
Articles of Incorporation of AdCare Health Systems, Inc., filed with the Secretary of State of the State of Georgia on December 12, 2013
 
Incorporated by reference to Exhibit 3.3 of the Registrant’s Current Report on Form 8-K filed on December 27, 2013
3.5
 
Articles of Correction to Articles of Incorporation of AdCare Health Systems, Inc., filed with the Secretary of State of the State of Georgia on December 12, 2013
 
Incorporated by reference to Exhibit 3.1 of the Registrant’s Current Report on Form 8-K filed on December 27, 2013
3.6
 
Bylaws of AdCare Health Systems, Inc.
 
Incorporated by reference to Exhibit 3.4 of the Registrant’s Current Report on Form 8-K filed on December 27, 2013
3.7
 
Amendment No. 1 to the Bylaws of AdCare Health Systems, Inc.
 
Incorporated by reference to Exhibit 3.7 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013
4.1
 
Form of Registration Rights Agreement, dated March 28, 2014, by and among AdCare Health Systems, Inc. and the investors named therein
 
Incorporated by reference to Exhibit 4.23 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013
4.2
 
Form of 10% Subordinated Convertible Note Due April 30, 2015 issued by AdCare Health Systems, Inc.
 
Incorporated by reference to Exhibit 4.24 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013
4.3
 
Form of Warrant, dated March 28, 2014, issued by AdCare Health Systems, Inc. to the placement agent and its affiliates in connection with the offering of 10% Subordinated Convertible Notes Due April 30, 2015
 
Incorporated by reference from Exhibit 4.3 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014
10.1
 
Waiver and Amendment, dated February 10, 2014, by and among the Company and Gemino Healthcare Finance, LLC
 
Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K filed on February 14, 2014
10.2
 
Termination Notice, dated December 31, 2013 to Living Center, LLC, Kenmetal, LLC, Senior NH, LLC, BAN NH, LLC, and Oak Lake, LLC
 
Incorporated by reference to Exhibit 99.2 of the Registrant’s Current Report on Form 8-K filed on February 14, 2014
10.3
 
Termination Notice, dated December 31, 2013 to Harrah Whites Meadows Nursing, LLC
 
Incorporated by reference to Exhibit 99.3 of the Registrant’s Current Report on Form 8-K filed on February 14, 2014
10.4
 
Termination Notice, dated December 31, 2013 to Meeker Nursing, LLC
 
Incorporated by reference to Exhibit 99.4 of the Registrant’s Current Report on Form 8-K filed on February 14, 2014
10.5
 
Termination Notice, dated December 31, 2013 to MCL Nursing, LLC
 
Incorporated by reference to Exhibit 99.5 of the Registrant’s Current Report on Form 8-K filed on February 14, 2014

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10.6
 
Letter agreement, dated February 28, 2014, by and among AdCare Health Systems, Inc., AdCare Administrative Services, LLC, AdCare Oklahoma Management, LLC, Hearth & Home of Ohio, Inc., BAN NH, LLC, Senior NH, LLC, Oak Lake, LLC, Kenmetal, LLC, Living Center, LLC, Meeker Nursing, LLC, Meeker Property Holdings, LLC, MCL Nursing, LLC, McLoud Property Holdings, LLC, Harrah Whites Meadows Nursing, LLC, Harrah property Holdings, LLC, Christopher F. Brogdon, GL Nursing, LLC, and Marsh Pointe Management, LLC
 
Incorporated by reference to Exhibit 10.333 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013
10.7
 
Note, dated February 28, 2014, by and among AdCare Health Systems, Inc. and Christopher F. Brogdon
 
Incorporated by reference to Exhibit 10.334 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013
10.8
 
Fourth Amendment to Secured Loan Agreement and Payment Guaranty, dated March 28, 2014, by and among Woodland Hills HC Property Holdings, LLC, Northridge HC&R Property Holdings, LLC, APH&R Property Holdings, LLC, Woodland Hills HC Nursing, LLC, Northridge HC&R Nursing, LLC, and APH&R Nursing, LLC, AdCare Health Systems, Inc., AdCare Property Holdings, LLC, AdCare Operations, LLC and KeyBank National Association
 
Incorporated by reference to Exhibit 10.335 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013
10.9
 
Agreement Regarding Exit Fees, dated March 28, 2014, by and among Woodland Hills HC Property Holdings, LLC, Northridge HC&R Property Holdings, LLC, APH&R Property Holdings, LLC, Woodland Hills HC Nursing, LLC, Northridge HC&R Nursing, LLC, APH&R Nursing, LLC, AdCare Health Systems, Inc., AdCare Property Holdings, LLC, AdCare Operations, LLC and KeyBank National Association
 
Incorporated by reference to Exhibit 10.336 of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013
10.10
 
Sublease Termination Agreement, entered into May 6, 2014 and effective as of May 31, 2014, by and between Winter Haven Homes, Inc. and ADK Administrative Property, LLC
 
Incorporated by reference from Exhibit 10.10 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014
10.11
 
Amendment to Consulting Agreement, dated May 6, 2014, by and between AdCare Health Systems, Inc. and Christopher F. Brogdon
 
Incorporated by reference from Exhibit 10.11 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014
10.12
 
Amendment, dated May 15, 2014, by among AdCare Health Systems, Inc., AdCare Administrative Services, LLC, AdCare Oklahoma Management, LLC, Hearth & Home of Ohio, Inc., BAN NH, LLC, Senior NH, LLC, Oak Lake, LLC, Kenmetal, LLC, Living Center, LLC, Meeker Nursing, LLC, Meeker Property Holdings, LLC, MCL Nursing, LLC, McLoud Property Holdings, LLC, Harrah Whites Meadows Nursing, LLC, Harrah Property Holdings, LLC, Christopher F. Brogdon, and GL Nursing, LLC
 
Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K filed on May 21, 2014
10.13
 
Amended and Restated Note, dated May 15, 2014, by and among AdCare Health Systems, Inc. and Christopher F. Brogdon
 
Incorporated by reference to Exhibit 99.2 of the Registrant’s Current Report on Form 8-K filed on May 21, 2014
10.14
 
Modification Agreement, dated as of July 2, 2014, by and among Glenvue H&R Property Holdings, LLC and The PrivateBank and Trust Company
 
Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K filed on July 23, 2014
10.15
 
Fifth Modification Agreement, dated as of July 22, 2014, by and among ADK Thomasville Operator, LLC, ADK Lumber City Operator, LLC, ADK LaGrange Operator, LLC, ADK Powder Springs Operator, LLC, ADK Thunderbolt Operator, LLC, Attalla Nursing ADK, LLC, Mountain Trace Nursing ADK, LLC, Mt. Kenn Nursing, LLC, Erin Nursing, LLC, CP Nursing, LLC Benton Nursing, LLC, Valley River Nursing, LLC, Park Heritage Nursing, LLC, Homestead Nursing, LLC, Woodland Manor Nursing, LLC, Mountain View Nursing, LLC, Little Rock HC&R Nursing, LLC, Glenvue H&R Nursing, LLC, Coosa Nursing ADK, LLC, QC Nursing, LLC, AdCare Health Systems, Inc., and The PrivateBank and Trust Company
 
Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K filed on July 29, 2014

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10.16
 
Separation and Release Agreement, dated May 29, 2014, by and between AdCare Health Systems, Inc. and Boyd P. Gentry
 
Incorporated by reference from Exhibit 10.16 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014
10.17
 
Escrow Agreement, dated May 29, 2014, by and between AdCare Health Systems, Inc., Boyd P. Gentry, and Hughes, White, Kralicek, P.C.
 
Incorporated by reference from Exhibit 10.17 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014
10.18
 
Sixth Modification Agreement, dated as of September 24, 2014, by and among ADK Thomasville Operator, LLC, ADK Lumber City Operator, LLC, ADK LaGrange Operator, LLC, ADK Powder Springs Operator, LLC, ADK Thunderbolt Operator, LLC, Attalla Nursing ADK, LLC, Mountain Trace Nursing ADK, LLC, Mt. Kenn Nursing, LLC, Erin Nursing, LLC, CP Nursing, LLC Benton Nursing, LLC, Valley River Nursing, LLC, Park Heritage Nursing, LLC, Homestead Nursing, LLC, Woodland Manor Nursing, LLC, Mountain View Nursing, LLC, Little Rock HC&R Nursing, LLC, Glenvue H&R Nursing, LLC, Coosa Nursing ADK, LLC, QC Nursing, LLC, AdCare Health Systems, Inc., and The PrivateBank and Trust Company
 
Filed herewith
10.19
 
Promissory Note, dated September 24, 2014, by and among Woodland Manor Nursing, LLC, Glenvue H&R Nursing, LLC and The PrivateBank and Trust Company
 
Filed herewith
10.20
 
Guaranty of Payment and Performance, dated September 24, 2014, by and between AdCare Health Systems, Inc. and The PrivateBank and Trust Company
 
Filed herewith
10.21
 
Loan and Security Agreement, dated September 24, 2014, by and among Woodland Manor Nursing, LLC, Glenvue H&R Nursing, LLC and The PrivateBank and Trust Company
 
Filed herewith
10.22
 
Surplus Cash Note, dated September 24, 2014, by and between Woodland Manor Property Holdings, LLC and AdCare Administrative Services, LLC
 
Filed herewith
10.23
 
Security Instrument, Mortgage & Deed of Trust, dated September 24, 2014, by and between Woodland Manor Property Holdings, LLC and Housing & Healthcare Finance, LLC.
 
Filed herewith
10.24
 
Security Instrument, Mortgage & Deed of Trust, dated September 24, 2014, by and between Glenvue H&R Property Holdings, LLC and Housing & Healthcare Finance, LLC
 
Filed herewith
10.25
 
Healthcare Regulatory Agreement - Borrower, dated September 24, 2014, by and between Woodland Manor Property Holdings, LLC and The U.S. Department of Housing and Urban Development
 
Filed herewith
10.26
 
Healthcare Regulatory Agreement - Borrower, dated September 24, 2014, by and between Glenvue H&R Property Holdings, LLC and U.S. Department of Housing and Urban Development
 
Filed herewith
10.27
 
Healthcare Facility Note, dated September 24, 2014, by and between Woodland Manor Property Holdings, LLC and Housing & Healthcare Finance, LLC
 
Filed herewith
10.28
 
Healthcare Facility Note, dated September 24, 2014, by and between Glenvue H&R Property Holdings, LLC and Housing & Healthcare Finance, LLC.
 
Filed herewith
10.29
 
Separation Agreement, dated August 11, 2014, by and between AdCare Health Systems, Inc. and David Rubenstein
 
Filed herewith
10.30
 
Note, dated October 10, 2014, by and among AdCare Health Systems, Inc. and Riverchase Village ADK, LLC
 
Incorporated by reference to Exhibit 99.1 of the Registrant’s Current Report on Form 8-K filed on October 17 , 2014
10.31
 
Second Amended and Restated Note, dated October 10, 2014, by and among AdCare Health Systems, Inc. and Christopher F. Brogdon
 
Incorporated by reference to Exhibit 99.2 of the Registrant’s Current Report on Form 8-K filed on October 17 , 2014

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10.32
 
Second Amendment, dated October 10, 2014, by among AdCare Health Systems, Inc., AdCare Administrative Services, LLC, AdCare Oklahoma Management, LLC, Hearth & Home of Ohio, Inc., BAN NH, LLC, Senior NH, LLC, Oak Lake, LLC, Kenmetal, LLC, Living Center, LLC, Meeker Nursing, LLC, Meeker Property Holdings, LLC, MCL Nursing, LLC, McLoud Property Holdings, LLC, Harrah Whites Meadows Nursing, LLC, Harrah Property Holdings, LLC, Christopher F. Brogdon, and GL Nursing, LLC

 
Incorporated by reference to Exhibit 99.3 of the Registrant’s Current Report on Form 8-K filed on October 17 , 2014
10.33
 
Executive Employment Agreement, dated October 10, 2014, by and among AdCare Health Systems, Inc. and William McBride III
 
Incorporated by reference to Exhibit 99.4 of the Registrant’s Current Report on Form 8-K filed on October 17 , 2014
31.1
 
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act
 
Filed herewith
31.2
 
Certification of CAO pursuant to Section 302 of the Sarbanes-Oxley Act
 
Filed herewith
32.1
 
Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act
 
Filed herewith
32.2
 
Certification of CAO pursuant to Section 906 of the Sarbanes-Oxley Act
 
Filed herewith
101
 
The following financial information from AdCare Health Systems, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i)  Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013, (ii) Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013, (iv) Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2014 and (v) the Notes to Consolidated Financial Statements.
 
Filed herewith


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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused the report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
ADCARE HEALTH SYSTEMS, INC.
 
 
 
(Registrant)
 
 
 
 
Date:
November 13, 2014
 
/s/ William McBride III
 
 
 
William McBride III
 
 
 
Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
November 13, 2014
 
/s/ Sheryl A. Wolf
 
 
 
Sheryl A. Wolf
 
 
 
Chief Accounting Officer
 
 
 
(Principal Financial Officer)

65


Exhibit 10.18
17987406.2
09-24-14

SIXTH MODIFICATION AGREEMENT

THIS SIXTH MODIFICATION AGREEMENT dated as of September 24, 2014 (this " Agreement " ), is entered into by and among ADK THOMASVILLE OPERATOR, LLC ( " Borrower 1 " ) , ADK LUMBER CITY OPERATOR, LLC ( " Borrower 2 " ), ADK LAGRANGE OPERATOR, LLC ( " Borrower 4 " ), ADK POWDER SPRINGS OPERATOR,      LLC ( " Borrower 5 " ), ADK THUNDERBOLT OPERATOR,      LLC ( " Borrower 7 " ), ATTALLA NURSING ADK, LLC ( " Borrower 9 " ), MOUNTAIN TRACE NURSING ADK, LLC, an Ohio limited liability com pany ( " Borrower 10 " ) , MT. KENN NURSING,      LLC ( " Borrower 11 " ), ERIN NURSING, LLC ( " Borrower 12 " ) , CP NURSING, LLC ( " Borrower 13 " ), BENTON NURSING, LLC ( " Borrower 14 " ), VALLEY RIVER      NURSING, LLC ( " Borrower 15 ") , PARK HERITAGE NURSING, LLC ( " Borrower 16 " ), HOMESTEAD NURSING,      LLC ( " Borrower 17 " ), WOODLAND MANOR NURSING, LLC ( " Borrower 18 " ), MOUNTAIN VIEW NURSING, LLC ( " Borrower 19 " ), LITTLE ROCK HC&R NURSING, LLC (" Borrower 21 "), GLENVUE H&R NURSING, LLC ( " Borrower 24 " ) and COOSA NURSING ADK, LLC ( " Borrower 25 " ), QC NURSING, LLC ( " Borrower 26 "), each a Georgia limited liab ility company except as hereinabove set forth (the " Borrowers " ), ADCARE HEALTH SYSTEMS, INC., a Georgia corporation (the " Guarantor " ) (the Borrowers and the Guarantor bein g sometimes r eferred to herein collectively as the " Borrower/Guarantor Parties " ), and THE PRIVATEBANK AND TRUST COMPANY , an Illinois banking corporation ( " Lender " ).

RECITALS

A.      The Borrower/Guarantor Parties and the Lender heretofore entered into the following documents (collectively, the “ Documents ” ):
(i)      Loan and Security Agreement dated as of September 20, 2012 (the “ Loan Agreement ” ), by and among the Borrowers, ADK Jeffersonville Operator, LLC ( “ Borrower 3 ” ), ADK Oceanside Operator, LLC ( “ Borrower 6 ” ), ADK Savannah Beach Operator, LLC ( “ Borrower 8 ” ), Northridge HC&R Nursing, LLC (“ Borrower 20 ” ), Woodland Hills HC Nursing, LLC (“ Borrower 22 ” ), and APH&R Nursing, LLC, each a Georgia limited liability company (“ Borrower 23 ” and together with Borrowers 3, 6, 8, 20 and 22, the “ Released Borrowers ” ; the Released Borrowers together with the Borrowers, the “ Original Borrowers ” ), and the Lender.
(ii)      Promissory Note dated September 20, 2012 (the “ Note ” ), from the Original Borrowers to the Lender in the principal amount of $10,600,000.
(iii)      Guaranty of Payment and Performance dated as of September 20, 2012, by the Guarantor to and for the benefit of the Lender.







B.      The Documents were previously modified and amended by the following documents (the “ Previous Modifications ” ): (i) the Modification Agreement dated as of October 26, 2012 (the “ Modification ” ), by and among the Original Borrowers, the Guarantor and the Lender; (ii) the Memorandum of Agreement dated January 25, 2013 (the “ Second Modification ” ), by and among Borrower 20, Borrower 22, Borrower 23 and the Lender; (iii) the Third Modification Agreement dated as of September 30, 2013, by and among the Borrowers, Borrower 3, Borrower 6, Borrower 8, the Guarantor and the Lender (the “ Third Modification ” ); (iv) the Fourth Modification Agreement dated as of November 26, 2013, by and among the Borrowers, the Guarantor and the Lender (the “ Fourth Modification ” ); and (v) the Fifth Modification dated as of July 22, 2014, by and among the Borrowers, the Guarantor and the Lender.
C.      Borrower 20, Borrower 22 and Borrower 23 were released from their respective obligations under the Documents pursuant to the Second Modification.
D.      Borrower 3, Borrower 6 and Borrower 8 were released from their respective obligations under the Documents pursuant to the Third Modification.
E.      Borrower 1, Borrower 18 and Borrower 24 are being released from their respective obligations under the Documents pursuant to this Agreement.
F.      The parties desire to make certain modifications and amendments to the Documents, as modified and amended by the Previous Modifications, as more fully provided for herein, all as modifications, amendments and continuations of, but not as novations of, the Documents.



AGREEMENTS

In consideration of the premises and the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

Section 1. Recitals Part of Agreement; Defined Terms; References to Documents

(a) The foregoing Recitals are hereby incorporated into and made a part of this Agreement.

(b)
All capitalized terms used and not otherwise defined in this Agreement shall hav e
the meanings set forth in the Loan Agreement.

(c) Except as otherwise stated herein , all references in this Agreement to any one or more of the Documents shall be deemed to include the Previous Modifications and amendments to the Documents provided for in the Previous Modifications , whether or not express re f erence is made to such previous modifications and amendments.

Section 2 .      Reduction of Loan Amount. The amount of the Loan and the Note and the Loan Amount are hereby reduced from $ 10 , 600,000 to $9,100 , 000, and all of the Documents,

2


as they may have been modified and amended by the Previous Modifications , are hereby modified and amended accordingly. Without limitation on the generality of the foregoing provisions of this Section, the amount "$1 0,600,000" is hereby changed to "$9, 1 00,000" each time it appears in the Documents, as they may have been modified and amended by the Previous Modification, in reference to the amount of the Loan and the Note, including, without limitation, in the defined term "Loan Amount" in Section 1 . 1 of the Loan Agreement, in the upper left corner of page 1 of the Note, in the definition of the term "Loan" in Section 1 of the Note, and in Recital paragraph A of the Guaranty.

Section 3.      Release of ADK Thomasville Operator, LLC, Woodland Manor Nursing, LLC and Glenvue H&R Nursing, LLC.      ADK Thomasville Operator, LLC ( " Borrower 1 " ) has requested that it be released from its obligations under the Documents due to the fact that Borrower 1 no longer operates a Facility. Woodland Manor Nursing, LLC ( " Borrower 18 " ) and Glenvue H&R Nursing, LLC ( " Borrower 24 " ) have each requested that they be released from their respective obligations under the Documents due to the fact that their respective facilities are being financed by the Department of Housing and Urban Development and they are entering into a new loan agreement with the Lender with respect to such Facilities. The Lender is agreeable to such request and hereby releases Borrower 1, Borrower 18 and Borrower 24 as Borrowers under the Loan Agreement , and releases the Collateral which is the property of Borrower 1, Borrower 18 and Borrower 24 as security for the Loan.

Section 4.      Change in Definitions. The following defined terms in Section 1.1 of the Loan Agreement, as modified and amended by the Previous Modifications, are hereby further modified and amended in their entirety to read as follows effective as of the date of this Agreement, with the existing defined terms to continue to be effective for periods prior to the date of this Agreement:
Loan Amount:      $9,100,000, which includes the $3,75 0 ,000 Letter of
Credit Amount.

Borrowers: Borrowers 1 through 26, except for Borrowers 1, 3 , 6 , 8, 18,
20, 22, 23 and 24.

Facility: Each of the 17 Facilities which are operated by Borrowers in the
Projects, described as follows:

Facility
Borrower
Facilitv Name
Location
Beds
1
Borrower 1
Released
 
52
2
Borrower 2
Lumber City Nursing
and Rehabilitation Center
93 Highway 19 ,
Lumber City, T e lfair County, Georgia
86
3
Borrower 3
Released
 
 
4
Borrower 4
LaGrange Nursing and
Rehab Center
2111 West Point Road,
LaGrange , Troup County , Georgia
138
5
Borrower 5
Powder Springs Nursing
and Rehab Center
3460 Powder Springs
Road , Powder Springs ,
208

3



 
 
 
Cobb County, Georgia
 
6
Borrower 6
Releas ed ,
 
85
7
Borrower 7
Tara at Thunderbolt Nursing and Rehabilitation Center
3223 Falligant Avenue, Thunderbolt , Chatham County, Georgia
134
8
Borrower 8
Released
 
50
9
Borrower 9
Attalla Health Care
915 Stewart Avenue SE, Attalla, Etowah County , A l abama
182


4


10
Borrower 10
Mountain Trace Nursing and Rehabilitat i on Center
417 Mountain Trace Road, Sylva, Jackson County, North Carolina
106
11
Borrower 11
Autumn Breeze Healthcare Center
1480 Sandtown Road, Marietta, Cobb County, Georgia
109
12
Borrower 12
Southland Healthcare
and Rehab Center
606 Simmons Street, Dub l in, Laurens County, Georgia
126
13
Borrower 13
College Park Hea l thcare Center
1765 Temp l e Avenue, College Park, Fulton County, Georgia
100
14
Borrower 14
Bentonville Manor
Nursing Hom e
224 South Main Street, Bentonville, Benton County, Arkansas
95
15
Borrower 15
River Valley Health and Rehabilitation Center
5301 Whee l er Ave, Fort Smith, Sebastian County, Arkansas
117
16
Borrower 16
Heritage Park Nursing Center
1513 South Dixieland Road, Rogers, Benton County, Arkansas
100
17
Borrower 17
Homestead Manor Nursing Home
826 North Street, Stamps, LaFayette County, Arkansas
94
18
Borrower 18
Released
 
 
19
Borrower 19
Stone County Nursing and Rehabilitation Center
706 Oak Grove Street, Mountain View, Stone County, Arkansas
97
20
Borrower 20
Released
 
 
21
Borrower 2 1
Little Rock Healthcare and Rehab, a/k/a West Markham Sub Acute & Rehab Center
5720 W. Markham, Little Rock, Pu l aski County, Arkansas
157
22
Borrower 22
Released
 
 
23
Borrower 23
Released
 
 
24
Borrower 24
Released
 
 
25
Borrower 25
Coosa Valley
Healthcare
513 Pineview Avenue, Glencoe, Etowah County, Alabama 35905
124

5



26
Borrower 26
Quail Creek Nursing and Rehabilitation Center
13500 Brandon Place, Oklahoma City, Oklahoma County, Oklahoma
118


Leases: Leases by Owners to each of Borrower 11 through Borrower 26 (except for Borrowers 18, 20, 22, 23, 24 and 25) of the respective Projects and subleases by Sublessor to each of Borrower 1 through Borrower 8 (except for Borrowers 1, 3, 6 and 8) of the respective Projects dated as follows:

Facilit y
Borrower
Owner/Sublessor
Date of Lease/Sublease
1
Borrower 1
Released
 
2
Borrower 2
Owner, Master Lease Lessor -
William Foster
Sublessor - ADK Georgia , LLC
Master Lease - August 1 , 20 10
Sublease - August 1'
20 10
3
Borrower 3
Released
 
4
Borrower 4
Owner, Master Lease Lessor -
William Foster
Sublessor - ADK Georgia, LLC
Master Lease - August 1,
2010
Sublease - August 1'
20 10
5
Borrower 5
Owner, Master Lease Lessor -
William Foster
Sub l essor - ADK Georgia, LLC
Master Lease - August 1,
2010
Sublease- August1'
2010
6
Borrower 6
Released
 
7
Borrower 7
Owner , Master Lease Lesso r-
William Foster
Sub l essor - ADK Georgia, LLC
Master Lease - August 1,
2010
Sublease - September 1'
2010
8
Borrower 8
Released
 
9
Borrower 9
Owner, Borrower 9
None
10
Borrower 10
Owner, Borrower 10
None
11
Borrower 11
Owner, Mt. Kenn Property
Holdin g s, LLC
May 1, 2011



6


12
Borrower 12
Owner, Erin Property Holdings, LLC
May 1, 2011
13
Borrower 13
Owner , CP Property Holdings, LLC
September 6, 2011
14
Borrower 14
Owner , Benton Property
Holdings , LLC
August 31,2011
15
Borrower 15
Owner, Valley River Property
Holdings, LLC
August 31, 2011
16
Borrower 16
Owner , Park Heritage Property
Holdings, LLC
August 31, 2011

17
Borrower 17
Owner, Homestead Property
Holdings, LLC
August 31, 2011
18
Borrower 18
 Released
 
19
Borrower 19
Owner , Mount V Property Holdings , LLC
November 30, 2011

20
Borrower 20
 Released
 
21
Borrower 2 1
Owner, Little Rock HC&R
Property Holdings, LLC
April 1,2012
22
Borrower 22
 Released
 
23
Borrower 23
 Released
 
24
Borrower 24
 Released
 
25
Borrower 25
Owner , Borrower 25
None
26
Borrower 26
Owner , QC Property Ho l dings,
LLC
June 25 , 2012, amended
July 1, 2012


Section 5.      Change in Section ll.l(b) of the Loan Agreement.      Section 11.1(b) of the Loan Agreement, as modified and amended by the Previous Modifications , i s her eby further modified and amended in its entirety to read as follows:

(b) Declare the Note to be due and payable forthwith, without presentment , demand, protest or other notice of any kind, all of which Borrowers hereby express l y waive , and in the event of the occurrence of an Event of Default under Section 10.1(h) or 10 . 1 (i) of thi s Agreement, the Note shall automatically b ecome due and payable immediately ;

7



Section 6.      Change in Section 6 of the Note. The first sentence of Section 6 of the Note, as modified and amended by the Previous Modifications, is hereby further modified and amended in its entirety to read as follows:

At the election of the holder hereof, and without notice, the principal balance remaining unpaid under this Note, and all unpaid interest accrued thereon and any other amounts due hereunder, shall be and become immediately due and payable in full upon the occurrence of any Event of Default, and in the event of the occurrence of certain Events of Default under the Loan Agreement, this Note shall automatically become due and payable immediately as provided in the Loan Agreement.

Section 7.      Change in Minimum Fixed Charge Coverage Ratio of Borrowers.
Section 7.13 of the Loan Agreement, as modified and amended by the Previous Modifications, is hereby further modified and amended in its entirety to read as follows:

7.13     Minimum Fixed Charge Coverage Ratio of Borrowers. It is a condition of this Agreement and the Loan that as of the end of each fiscal quarter commencing with the fiscal quarter ending December 31, 2012, that the ratio of --

(i) the amount of the combined EBITDAR for Borrowers for
the 12-month period ending on the last day of such quarter, to

(ii) the sum of the combined amounts of the following for Borrowers for the 12-month period ending on the last day of such quarter:
(A) Rental Expense, plus (B) Debt Service, plus (C) Distributions, other than any amounts which were treated as an expense for accounting purposes,

shall be not less than 1.05 to 1.00. Notwithstanding the definition of the term Net Income in Section 1.1 of this Agreement, the Net Income for each Borrower used in calculating EBITDAR of such Borrower for the purpose of this Section for any period, shall be computed by taking into account an imputed capital expenditures reserve allowance at the annual rate of $350 per licensed bed in such Borrower's Facility. For the avoidance of doubt, (i) unlike Section 7.12 hereof, the Net Income for Borrowers used in calculating EBITDAR of Borrowers for the purpose of this Section for any period shall be computed by taking into account each Borrower 's actual management fees for such period only and not taking into account any imputed management fees. Notwithstanding the foregoing provisions of this Section, in the case of the fiscal quarters ending December 31, 2012, March 31,2013, and June 30,2013, the calculation of such ratio shall be made for the period commencing on October 1, 20 12, and ending on the last day of such quarter, instead of for the full 12-month period ending on the last day of such quarter.

Section 8.      Change in Exhibit A . Exhibit A to the Loan Agreement, as modified
and amended by the Previous Modifications, is hereby further modified and amended in its

8



entirety to be as attached to this Agreement effective as of the date of this Agreement, with the existing Exhibit A to the Loan Agreement , as modified and amended by the Previous Modifications , to continue to be effective for periods prior to the date of this Agreement.

Section 9.      Attachment to Note. The Lender may, and prior to any transfer by it of the Note shall, attach a copy of this Agreement to the original Note and p l ace an endorsement on the original Note making reference to the fact that such attachment has been made.

Section 10.      Representations and Warranties. The term " Signing Entity " as used in this Section means any entity (other than a Borrower/Guarantor Party itself) that appears in the signature block of any Borrower/Guarantor Party in this Agreement, any of the Documents or any of the Previous Modifications, if any. In order to induce the Lender to enter into this Agreement, the Borrower/Guarantor Parties hereby represent and warrant to the Lender as follows as of the date of this Agreement and if different, as of the date of the execution and delivery of this Agreement :

(a) Each Borrower is a li mited liability company duly organized, validly existing and in good standing under the laws of the State of which is stated in the Preambles to this Agreement, and if such State is not the State in which its Facility is l ocated, such Borrower is duly registered or qualified to transact business and in good standing in the State in which its Facility is located. Each Borrower has all necessary power and authority to carry on its present business, and has full right, power and authority to enter into this Agreement , each of the Documents to which it is a party and the Previous Modifications, and to perform and consummate the transactions contemplated hereby and thereby.

(b) The Guarantor is a corporation duly organized, validly existing and in good standing under the laws of the State of Georgia, has all necessary power and authority to carry on its present business, and has full right, power and authority to enter into this Agreement, each of the Documents to which it is a party and the Previous Modifications, and to perform and consummate the transactions contemplated hereby and thereby .

(c) Each Signing Entity is duly organized , valid l y existing and in good standing under the laws of the State in which it is organized, has all necessary power and authority to carry on its present business , and has full right, power and authority to execute this Agreement , the Documents and the Previous Modifications in the capacity shown in each signature block contained in this Agreement, the Documents and the Previous Modifications in which its name appears , and such execution has been duly authorized by all necessary legal action applicable to such Signing Entity.

(d) This Agreement , the Documents and the Previous Modifications have been duly authorized , executed and delivered by such of the Borrower/Guarantor Parties as are parties thereto , and this Agreement, the Documents and the Previous Modifications constitute valid and legally binding obligations enforceable against such of the Borrower/Guarantor Parties as are parties thereto. The execution and delivery of this Agreement , the Documents and the Previous Modifications and compliance with the provisions thereof under the circumstances contempl a ted therein do not and will not conflict with or constitute a breach or violation of or default under the organizational documents of any Borrower/Guarantor Party or any Signing Entity, or any

9



agreement or other instrument to which any of the Borrower/Guarantor Parties or any Signing Enti t y is a party, or by which any of th em i s bound, or to which any of their respect i ve properties are subject, or any existing law, administrative regu l ation, court order or consent decree to which any of them is subject.

(e) The Borrower/Guarantor Parties are in full compliance w ith all of the terms and conditions of the Documents to which they are a party and the Previous Modifications, and no Default or Event of Default has occurred and is co ntinu ing with respect to any of the Documents or the Previous Modifications.

(f) There is no litigation or administrative proceeding pending or t hr eatened to restrain or enjoin the transactions contemplated by this Agreemen t , any of the Documents or the Previous Modifications, or questioning the va li dity thereof, or in any way contesting the exis t ence or powers of any of the Borrower/Guarantor Parties or any Signing Entity, or in which an unfavorable decision, ruling or finding would adversely affect the transactions contemplated by this Agreement, any of the Documents or the Previous Modifications, or would result in any material adverse change i n the financial condition, properties, business or operat ion s of any of the Borrower/Guarantor Parties.

(g)
The statements contained in the Recitals to this Agreement are true and correct.

Sect ion 11.      Documents to Remain in Effect; Confirmation of Obligations; References.      The Documents shall remain in full force and effect as originally executed and delivered by the parties, except as previously modified and amended by the Previous Modifications and as expressly modified and amended herein. In order to induce the Lender to enter into this Agreement, the Borrower/Guarantor P arties hereby (i) confirm and reaffirm all of thei r obligations under the Documents, as previously modified and amended by the Previous Modifications and as modified and amended herein; (ii) acknowledge and agree that the Lender, by entering into this Agreement, does not waive any existing or future default or event of default , under any of the Documents, or any rights or remedies under any of the Documents, except as expressly provided herein; (iii) acknowledge and agree t hat the Lender has not heretofore waived any default or event of default under any of the Documents, or any rights or remedies under any of the Documents; and (iv) acknowledge and agree that they do not have any defense, setoff or counterclaim to the payment or performance of any of their obligations under, or to the enforcement by the Lender of, the Documents, as previous l y modified and amended by the Previous Modifications and as modified and amended herein, including, without limitation, any defense, setoff or counterclaim based on the covenant of good faith and fair dealing.      All references in the Documents to any one or more of the Documents, or to the "Loan Documents," shall be deemed to refer to such Document, Documents or Loan Documents, as the case may be, as previously modified and amended by the Previous Modifications and as modified and amended by this Agreement. Electronic records of executed documents maintained by the Lender shall be deemed to be originals thereof.

Section 12.      Certifications, Representations and Warranties. In order to induce the Lender to enter into this Agreement, the Borrower/Guarantor Parties hereby certify, represent and warrant to the Lender that all certifications, representations and warranties contained in the Documents and the Previous Modifications and in all certificates heretofore delivered to the

10



Lender are true and correct as of the date of this Agreement and if different, as of the date of the execution and delivery of this Agreement, and all such certifications, representations and warranties are hereby remade and made to speak as of the date of this Agreement and if different, as of the date of the execution and delivery of this Agreement.

Section 13.      Entire Agreement; No Reliance.      This Agreement sets forth all of the covenants, promises, agreements, conditions and understandings of the parties relating to the subject matter of this Agreement, and there are no covenants, promises, agreements, conditions or understandings, either oral or written, between them relating to the subject matter of this Agreement other than as are herein set forth. The Borrower/Guarantor Parties acknowledge that they are executing this Agreement without relying on any statements, representations or warranties, either oral or written, that are not expressly set forth herein.

Section 14.      Successors.      This Agreement shall inure to the benefit of and shall be binding upon the parties and their respective successors, assigns and lega l representatives.

Section 15.      Severability . In the event any provision of this Agreement shall be held inval i d or unenforceable by any court of competent jurisdiction, such holding shall no t invalidate or render unenforceable any other provision hereof.

Section 16.      Amendments, Changes and Modifications.      This Agreement may be amended, changed, modified, altered or terminated only by a written instrument executed by all of the parties hereto.

Section 17.      Construction.

(a) The words "hereof," "herein," and "hereunder," and other words of a similar import refer to this Agreement as a whole and not to the individual Sections in which such terms are used.

(b) References to Sections and other subdivisions of this Agreement are to the designated Sections and other subdivisions of this Agreement as originally executed.

(c) The headings of this Agreement are for convenience only and shall not define or limit the provisions hereof.

(d) Where the context so requires, words used in singular shall include the plural and vice versa, and words of one gender shall include all other genders.

(e) The Borrower/Guarantor Parties and the Lender, and their respective legal counsel, have participated in the drafting of this Agreement, and accordingly the general rule of construction to the effect that any ambiguities in a contract are to be resolved against the party drafting the contract shall not be employed in the construction and interpretation of this Agreement.

Section 18.      Counterparts; Electronic Signatures. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together

11



constitute but one and the same document. Receipt of an executed signature page to this Agreement by facsimile or other electronic transmission shall constitute effective delivery thereof. An electronic record of this executed Agreement maintained by the Lender shall be deemed to be an original.

Section 19.      Governing Law. This Agreement is prepared and entered into with the intention that the law of the State of Illinois shall govern its construction and enforcement.



[SIGNATURE PAGE(S) AND EXHIBIT(S), IF ANY, FOLLOW THIS PAGE]



12


IN WITNESS WHEREOF , the parties have executed this Agreement as of the date first above written.

ADK Lumber City Operator, LLC
ADK LaGrange Operator, LLC
ADK Powder Springs Operator, LLC
ADK Thunderbolt Operator, LLC
Attalla Nursing ADK, LLC
Mountain Trace Nursing ADK, LLC
Mt. Kenn Nursing, LLC
Erin Nursing, LLC
CP Nursing, LLC
Benton Nursing, LLC
Valley River Nursing, LLC
Park Heritage Nursing, LLC
Homestead Nursing, LLC
Mountain View Nursing, LLC
Little Rock HC&R Nursing, LLC
COOSA NURSING ADK, LLC
QC NURSING, LLC

 
 
 
By
/s/ David Rubenstein
 
David Rubenstein, Manager of each Borrower

ADCARE HEALTH SYSTEMS, INC.
 
 
By
/s/ Ronald W. Fleming
 
Ronald W. Fleming, Chief Financial Officer


- AdCare Portfolio Operator Loan Sixth Modification Agreement -
- Signature Page 1 -




THE PRIVATEBANK AND TRUST COMPANY
 
 
By
/s/ Amy K. Hallberg
 
Amy K. Hallberg, Managing Director



- AdCare Portfolio Operator Loan Sixth Modification Agreement -
- Signature Page 2 -








EXHIBIT A

DIRECT AND INDIRECT OWNERSHIP OF BORROWERS

[See Attached Organization Chart]






















































- AdCare Portfolio Operator Loan Sixth Modification Agreement -
- Signature Page 2 -



Exhibit 10.19
17614131.3     
09-10-14

PROMISSORY NOTE

$1,500,000
Chicago, Illinois
September 24, 2014

1.      AGREEMENT TO PAY . For value received, WOODLAND MANOR NURSING, LLC and GLENVUE H&R NURSING, LLC , each a Georgia limited liability company (collectively, the “ Borrowers ” ), hereby jointly and severally promise to pay to the order of THE PRIVATEBANK AND TRUST COMPANY , an Illinois banking corporation (the “ Lender ” ), the principal sum of $1,500,000 (the “ Loan ” ), or so much of the Loan as may be advanced under and pursuant to that certain Loan and Security Agreement dated as of even date herewith (the “ Loan Agreement ” ), executed by and among the Borrowers and the Lender, on or before September 24, 2017 (the “ Maturity Date ” ), at the time and place and in the manner hereinafter provided, together with interest thereon at the rate or rates described below, and any and all other amounts which may be due and payable hereunder or under any of the “ Loan Documents ” (as defined in the Loan Agreement) from time to time. All capitalized terms used and not otherwise defined in this Note shall have the same meanings as in the Loan Agreement. Each disbursement on the Loan made by the Lender, and all payments on account of the principal and interest thereof shall be recorded on the books and records of the Lender and the principal balance as shown on such books and records, or any copy thereof certified by an officer of the Lender, shall be rebuttably presumptive evidence of the principal amount owing hereunder.
2.      INTEREST RATE .
2.1      Interest Prior to Default . Except as otherwise expressly provided in this Note, interest shall accrue on the principal balance of this Note through the Maturity Date at a rate of interest equal to the greater of (i) a floating per annum rate of interest equal to the “ Prime Rate ” (as defined below), plus 1.0%, or (ii) 5.0% per annum. Changes in the rate of interest to be charged hereunder based on the Prime Rate shall take effect immediately upon the occurrence of any change in the Prime Rate. For purposes of this Note, the term “ Prime Rate ” means the floating per annum rate of interest most recently announced by the Lender at Chicago, Illinois as its prime or base rate. A certificate made by an officer of the Lender stating the Prime Rate in effect on any given day, for the purposes hereof, shall be conclusive evidence of the Prime Rate in effect on such day. The Prime Rate is a base reference rate of interest adopted by the Lender as a general benchmark from which the Lender determines the floating interest rates chargeable on various loans to borrowers with varying degrees of creditworthiness and the Borrowers acknowledge and agree that the Lender has made no representations whatsoever that the Prime Rate is the interest rate actually offered by the Lender to borrowers of any particular creditworthiness.
2.2      Interest After Default . From and after the Maturity Date or upon the occurrence and during the continuance of an Event of Default, interest shall accrue on the unpaid principal balance during any such period at an annual rate (the “ Default Rate ” ) 5.0% greater than the

- 1 -


interest rate which would otherwise be in effect under the terms of this Note. However, in no event shall the Default Rate exceed the maximum rate permitted by law. The interest accruing under this Section shall be immediately due and payable by the Borrowers to the holder of this Note upon demand and shall be additional indebtedness evidenced by this Note.
2.3      Interest Calculation . Interest on this Note shall be calculated on the basis of a 360-day year and the actual number of days elapsed in any portion of a month in which interest is due. If any payment to be made by the Borrowers hereunder shall become due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in computing any interest in respect of such payment.
3.      PAYMENT TERMS .
3.1      Payment of Principal and Interest . Payments of principal and interest due under this Note, if not sooner declared to be due in accordance with the provisions hereof, shall be made as follows:
(a)      On the first day of the month of November, 2014, and on the first day of each month thereafter through and including the month in which the Maturity Date occurs, interest accrued on this Note shall be due and payable.
(b)      Principal shall be payable on this Note in accordance with the provisions of Section 3.3 of the Loan Agreement.
(c)      The unpaid principal balance of this Note, if not sooner paid or declared to be due in accordance with the terms hereof, together with all accrued and unpaid interest thereon and any other amounts due and payable hereunder or under any of the Loan Documents shall be due and payable in full on the Maturity Date.
3.2      Application of Payments . Prior to the occurrence of an Event of Default, all payments and prepayments on account of the indebtedness evidenced by this Note shall be applied as follows: (a) first, to fees, expenses, costs and other similar amounts then due and payable to the Lender, including, without limitation any prepayment premium, exit fee or late charges due hereunder, (b) second, to accrued and unpaid interest on the principal balance of this Note, (c) third, to the payment of principal due in the month in which the payment or prepayment is made, (d) fourth, to any escrows, impounds or other amounts which may then be due and payable under the Loan Documents, (e) fifth, to any other amounts then due the Lender hereunder or under any of the Loan Documents, and (f) last, to the unpaid principal balance of this Note in the inverse order of maturity. Any prepayment on account of the indebtedness evidenced by this Note shall not extend or postpone the due date or reduce the amount of any subsequent monthly payment of principal and interest due hereunder. After an Event of Default has occurred and is continuing, payments may be applied by the Lender to amounts owed hereunder and under the Loan Documents in such order as the Lender shall determine, in its sole discretion.
3.3      Method of Payments . All payments of principal and interest hereunder shall be paid by automatic debit, wire transfer, check or in coin or currency which, at the time or times of payment, is the legal tender for public and private debts in the United States of America and shall

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be made at such place as the Lender or the legal holder or holders of this Note may from time to time appoint in the payment invoice or otherwise in writing, and in the absence of such appointment, then at the offices of the Lender at 120 South LaSalle Street, Chicago, Illinois 60603. Payment made by check shall be deemed paid on the date the Lender receives such check; provided, however, that if such check is subsequently returned to the Lender unpaid due to insufficient funds or otherwise, the payment shall not be deemed to have been made and shall continue to bear interest until collected. Notwithstanding the foregoing, the final payment due under this Note must be made by wire transfer or other immediately available funds. With the exception of interest which under the terms of the Loan Documents is to be paid from a disbursement of proceeds of the Loan, interest, principal payments and any fees and expenses owed the Lender from time to time will be deducted by the Lender automatically on the due date from the Borrowers’ account with the Lender, other than the Governmental AR Account and the Lessee Rent Account, as designated in writing by the Borrowers. The Borrowers shall maintain sufficient funds in the account on the dates the Lender enters debits authorized by this Note. If there are insufficient funds in the account on the date the Lender enters any debit authorized by this Note, the debit will be reversed. The Borrowers may terminate this direct debt arrangement at any time by sending written notice to the Lender at the address specified above.
3.4      Late Charge . If any payment of interest or principal due hereunder is not made within five days after such payment is due in accordance with the terms hereof, then, in addition to the payment of the amount so due, the Borrowers shall pay to the Lender a “late charge” of five cents for each whole dollar so overdue to defray part of the cost of collection and handling such late payment. The Borrowers agree that the damages to be sustained by the holder hereof for the detriment caused by any late payment are extremely difficult and impractical to ascertain, and that the amount of five cents for each one dollar due is a reasonable estimate of such damages, does not constitute interest, and is not a penalty.
3.5      Principal Prepayments . The principal of this Note may be prepaid, at any time, in whole or in part, without premium or penalty, provided that such prepayment is accompanied by a simultaneous payment of all accrued and unpaid interest on this Note through the date of prepayment.
4.      SECURITY; LOAN DOCUMENTS . This Note is secured by the Loan Agreement and the other Loan Documents. Reference is hereby made to the Loan Agreement and the other Loan Documents (all of which are incorporated herein by reference as fully and with the same effect as if set forth herein at length) for a statement of the covenants and agreements contained therein, a statement of the rights, remedies, and security afforded thereby, and all matters therein contained.
5.      EVENTS OF DEFAULT . The occurrence of any one or more of the following events shall constitute an “ Event of Default ” under this Note:
(a)      The failure by the Borrowers to pay (i) any installment of principal or interest payable pursuant to this Note on the date when due, or (ii) any other amount payable to the Lender under this Note, the Loan Agreement or any of the other Loan Documents on the date when any such payment is due in accordance with the terms hereof or thereof; or

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(b)      The occurrence of any “Event of Default” under the Loan Agreement or any of the other Loan Documents.
For purposes of this Note, the term “ Default ” means the occurrence or existence of any event or circumstance which, with the giving of notice or passage of time, or both, would constitute an Event of Default.
6.      REMEDIES . At the election of the holder hereof, and without notice, the principal balance remaining unpaid under this Note, and all unpaid interest accrued thereon and any other amounts due hereunder, shall be and become immediately due and payable in full upon the occurrence of any Event of Default, and in the event of the occurrence of certain Events of Default under the Loan Agreement, this Note shall automatically become due and payable immediately as provided in the Loan Agreement. Failure to exercise this option shall not constitute a waiver of the right to exercise same in the event of any subsequent Event of Default. No holder hereof shall, by any act of omission or commission, be deemed to waive any of its rights, remedies or powers hereunder or otherwise unless such waiver is in writing and signed by the holder hereof, and then only to the extent specifically set forth therein. The rights, remedies and powers of the holder hereof, as provided in this Note and in all of the other Loan Documents are cumulative and concurrent, and may be pursued singly, successively or together against the Borrowers, any Guarantor hereof and any security given at any time to secure the repayment hereof, all at the sole discretion of the holder hereof. If any suit or action is instituted or attorneys are employed to collect this Note or any part hereof, the Borrowers promise and agree to pay all costs of collection, including reasonable attorneys’ fees and court costs.
7.      COVENANTS AND WAIVERS . The Borrowers and all others who now or may at any time become liable for all or any part of the obligations evidenced hereby, expressly agree hereby to be jointly and severally bound, and jointly and severally: (i) waive and renounce any and all homestead, redemption and exemption rights and the benefit of all valuation and appraisement privileges against the indebtedness evidenced by this Note or by any extension or renewal hereof; (ii) waive presentment and demand for payment, notices of nonpayment and of dishonor, protest of dishonor, and notice of protest; (iii) except as expressly provided in the Loan Documents, waive any and all notices in connection with the delivery and acceptance hereof and all other notices in connection with the performance, default, or enforcement of the payment hereof or hereunder; (iv) waive any and all lack of diligence and delays in the enforcement of the payment hereof; (v) agree that the liability of the Borrowers and each guarantor, endorser or obligor shall be unconditional and without regard to the liability of any other person or entity for the payment hereof, and shall not in any manner be affected by any indulgence or forbearance granted or consented to by the Lender to any of them with respect hereto; (vi) consent to any and all extensions of time, renewals, waivers, or modifications that may be granted by the Lender with respect to the payment or other provisions hereof, and to the release of any security at any time given for the payment hereof, or any part thereof, with or without substitution, and to the release of any person or entity liable for the payment hereof; and (vii) consent to the addition of any and all other makers, endorsers, guarantors, and other obligors for the payment hereof, and to the acceptance of any and all other security for the payment hereof, and agree that the addition of any such makers, endorsers, guarantors or other obligors, or security shall not affect the liability of the Borrowers, any guarantor and all others now liable for all or any part of the

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obligations evidenced hereby. This provision is a material inducement for the Lender making the Loan to the Borrowers.
8.      GENERAL AGREEMENTS .
8.1      Incorporation of Section 12.2 of Loan Agreement . The provisions of Section 12.2 of the Loan Agreement are hereby incorporated into and made a part of this Note.
8.2      Usury and Truth in Lending . The Loan is a “business loan” within the meaning of subparagraph (1)(c) contained in Section 205/4 of Chapter 815 of the Illinois Compiled Statutes, as amended, and does not violate the provisions of the usury laws of the State, any consumer credit laws or the usury laws of any state which may have jurisdiction over this transaction, the Borrowers or any property securing the Loan. The Loan is an exempted transaction under the Truth In Lending Act, 15 U.S.C., §1601, et seq., as amended.
8.3      Time . Time is of the essence hereof.
8.4      Governing Law . This Note is governed and controlled as to validity, enforcement, interpretation, construction, effect and in all other respects by the statutes, laws and decisions of the State of Illinois, without regard to its conflict of laws provisions.
8.5      Entire Agreement; Amendments . This Note sets forth all of the covenants, promises, agreements, conditions and understandings of the parties relating to the subject matter of this Note, and there are no covenants, promises, agreements, conditions or understandings, either oral or written, between them other than as are herein set forth. Each Borrower acknowledges that it is executing this Note without relying on any statements, representations or warranties, either oral or written, that are not expressly set forth herein. This Note may not be changed or amended orally but only by an instrument in writing signed by the party against whom enforcement of the change or amendment is sought.
8.6      No Joint Venture . The Lender shall not be construed for any purpose to be a partner, joint venturer, agent or associate of the Borrowers or of any lessee, operator, concessionaire or licensee of the Borrowers in the conduct of their business, and by the execution of this Note, the Borrowers agree to indemnify, defend, and hold the Lender harmless from and against any and all damages, costs, expenses and liability that may be incurred by the Lender as a result of a claim that the Lender is such partner, joint venturer, agent or associate.
8.7      Disbursement . This Note has been made and delivered at Chicago, Illinois and all funds disbursed to or for the benefit of the Borrowers will be disbursed in Chicago, Illinois.
8.8      Joint and Several Obligations; Successors and Assigns . If this Note is executed by more than one party, the obligations and liabilities of each Borrower under this Note shall be joint and several. This Note shall be binding upon and enforceable against each Borrower and their respective successors and assigns. This Note shall inure to the benefit of and may be enforced by the Lender and its successors and assigns.
8.9      Severable Provisions . If any provision of this Note is deemed to be invalid by reason of the operation of law, or by reason of the interpretation placed thereon by any

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administrative agency or any court, the Borrowers and the Lender shall negotiate an equitable adjustment in the provisions of the same in order to effect, to the maximum extent permitted by law, the purpose of this Note, and the validity and enforceability of the remaining provisions, or portions or applications thereof, shall not be affected thereby and shall remain in full force and effect.
8.10      Interest Limitation . If the interest provisions herein or in any of the Loan Documents shall result, at any time during the Loan, in an effective rate of interest which, for any month, exceeds the limit of usury or other laws applicable to the Loan, all sums in excess of those lawfully collectible as interest for the period in question shall, without further agreement or notice between or by any party hereto, be applied upon principal immediately upon receipt of such monies by the Lender, with the same force and effect as though the payer has specifically designated such extra sums to be so applied to principal and the Lender had agreed to accept such extra payment(s) as a premium-free prepayment. Notwithstanding the foregoing, however, the Lender may at any time and from time to time elect by notice in writing to the Borrowers to reduce or limit the collection to such sums which, when added to the said first-stated interest, shall not result in any payments toward principal in accordance with the requirements of the preceding sentence. In no event shall any agreed to or actual exaction as consideration for this Loan transcend the limits imposed or provided by the law applicable to this transaction or the maker hereof for the use or detention of money or for forbearance in seeking its collection.
8.11      Assignability . The Lender may at any time assign its rights in this Note and the Loan Documents, or any part thereof and transfer its rights in any or all of the collateral, and the Lender thereafter shall be relieved from all liability with respect to such collateral. In addition, the Lender may at any time sell one or more participations in this Note. The Borrowers may not assign their interest in this Note, or any other agreement with the Lender or any portion thereof, either voluntarily or by operation of law, without the prior written consent of the Lender.
9.      NOTICES . All notices required under this Note will be in writing and will be transmitted in the manner and to the addresses required by the Loan Agreement, or to such other addresses as the Lender and the Borrowers may specify from time to time in writing.
10.      LITIGATION PROVISIONS .
10.1      Consent to Jurisdiction . EACH BORROWER CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN CHICAGO, ILLINOIS, AND OF ANY STATE OR FEDERAL COURT LOCATED OR HAVING JURISDICTION IN THE COUNTY IN WHICH ITS FACILITY IS LOCATED, IN WHICH ANY LEGAL PROCEEDING MAY BE COMMENCED OR PENDING RELATING IN ANY MANNER TO THIS NOTE, THE LOAN OR ANY OF THE OTHER LOAN DOCUMENTS.
10.2      Consent to Venue . EACH BORROWER AGREES THAT ANY LEGAL PROCEEDING RELATING TO THIS NOTE, THE LOAN OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT AGAINST SUCH BORROWER IN ANY STATE OR FEDERAL COURT LOCATED IN CHICAGO, ILLINOIS, OR ANY STATE OR FEDERAL COURT LOCATED OR HAVING JURISDICTION IN THE COUNTY IN

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WHICH ITS FACILITY IS LOCATED. EACH BORROWER WAIVES ANY OBJECTION TO VENUE IN ANY SUCH COURT AND WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE FROM ANY SUCH COURT.
10.4      No Proceedings in Other Jurisdictions . EACH BORROWER AGREES THAT IT WILL NOT COMMENCE ANY LEGAL PROCEEDING AGAINST THE LENDER RELATING IN ANY MANNER TO THIS NOTE, THE LOAN OR ANY OF THE OTHER LOAN DOCUMENTS IN ANY COURT OTHER THAN A STATE OR FEDERAL COURT LOCATED IN CHICAGO, ILLINOIS, OR IF A LEGAL PROCEEDING IS COMMENCED BY THE LENDER AGAINST SUCH BORROWER IN A COURT IN ANOTHER LOCATION, BY WAY OF A COUNTERCLAIM IN SUCH LEGAL PROCEEDING.
10.5      Waiver of Jury Trial . EACH BORROWER HEREBY WAIVES TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATING TO THIS NOTE, THE LOAN OR ANY OF THE OTHER LOAN DOCUMENTS.
11.      CUSTOMER IDENTIFICATION - USA PATRIOT ACT NOTICE; OFAC AND BANK SECRECY ACT .  The Lender hereby notifies the Borrowers that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56, signed into law October 26, 2001) (the “ Act ” ), and the Lender’s policies and practices, the Lender is required to obtain, verify and record certain information and documentation that identifies the Borrowers, which information includes the name and address of the Borrowers and such other information that will allow the Lender to identify the Borrowers in accordance with the Act. In addition, the Borrowers shall (a) ensure that no person who owns a controlling interest in or otherwise controls any Borrower or any subsidiary of any Borrower is or shall be listed on the Specially Designated Nationals and Blocked Person List or other similar lists maintained by the Office of Foreign Assets Control ( “ OFAC ” ), the Department of the Treasury or included in any Executive Orders, (b) not use or permit the use of the proceeds of the Loan to violate any of the foreign asset control regulations of OFAC or any enabling statute or Executive Order relating thereto, and (c) comply, and cause any of its subsidiaries to comply, with all applicable Bank Secrecy Act ( “ BSA ” ) laws and regulations, as amended.
12.      EXPENSES AND INDEMNIFICATION . The Borrowers shall pay all costs and expenses incurred by the Lender in connection with the preparation of this Note and the Loan Documents, including, without limitation, reasonable attorneys’ fees and time charges of attorneys who may be employees of the Lender or any affiliate or parent of the Lender. The Borrowers shall pay any and all stamp and other taxes, UCC search fees, filing fees and other costs and expenses in connection with the execution and delivery of this Note and the other instruments and documents to be delivered hereunder, and agrees to save the Lender harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such costs and expenses. Each Borrower hereby authorizes the Lender to charge any account of such Borrower with the Lender for all sums due under this Section, other than the account which is governed by the DAISA. The Borrowers also agree to defend (with counsel satisfactory to the Lender), protect, indemnify and hold harmless the Lender and its officers, directors, employees, attorneys and agents (each an “ Indemnified Party ” ) from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs,

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expenses and distributions of any kind or nature (including, without limitation, the disbursements and the reasonable fees of counsel for each Indemnified Party thereto, which shall also include, without limitation, attorneys’ fees and time charges of attorneys who may be employees of the Lender), which may be imposed on, incurred by, or asserted against, any Indemnified Party (whether direct, indirect or consequential and whether based on any federal, state or local laws or regulations, including, without limitation, securities, environmental laws and commercial laws and regulations, under common law or in equity, or based on contract or otherwise) in any manner relating to or arising out of this Note or any of the Loan Documents, or any act, event or transaction related or attendant thereto, the preparation, execution and delivery of this Note and the Loan Documents, the making or issuance and management of the Loan, the use or intended use of the proceeds of this Note and the enforcement of the Lender’s rights and remedies under this Note and the other Loan Documents; provided, however, that the Borrowers shall not have any obligations hereunder to any Indemnified Party with respect to matters caused by or resulting from the willful misconduct or gross negligence of such Indemnified Party. To the extent that the undertaking to indemnify set forth in the preceding sentence may be unenforceable because it violates any law or public policy, the Borrowers shall satisfy such undertaking to the maximum extent permitted by applicable law. Any liability, obligation, loss, damage, penalty, cost or expense covered by this indemnity shall be paid to each Indemnified Party on demand, and failing prompt payment, together with interest thereon at the Default Rate from the date incurred by each Indemnified Party until paid by the Borrowers, shall be added to the obligations of the Borrowers evidenced by this Note and secured by the collateral securing this Note. The provisions of this Section shall survive the satisfaction and payment of this Note. However, while the HUD Financing is in effect, in no event shall the cost of such indemnification come from Project proceeds, nor shall it become a lien against the Project, the FHA Mortgagee’s Priority Collateral, or the AR Lender Priority Collateral. In no event shall any attorneys’ fees referred to in this or any other provision of this Note which are incurred in connection with any dispute relating to the HUD Financing be secured by the AR Lender Priority Collateral, and this sentence shall not be construed as permitting any attorneys’ fees which are incurred in connection with any dispute not relating to the HUD Financing to be secured by the AR Lender Priority Collateral so long as the HUD Financing is in effect.

[SIGNATURE PAGE(S) AND EXHIBIT(S),
IF ANY, FOLLOW THIS PAGE]


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IN WITNESS WHEREOF , the Borrowers have executed and delivered this Promissory Note as of the day and year first above written.

 
WOODLAND MANOR NURSING, LLC
 
By: /s/ David Rubenstein
 
David Rubenstein, Manager
 
 
 
GLENVUE H&R NURSING, LLC
 
By: /s/ David Rubenstein
 
David Rubenstein, Manager
                


AdCare Woodland/Glenvue HUD Operator Loan Note -
- Signature Page -



Exhibit 10.20
17604331.2     
09-10-14

GUARANTY OF PAYMENT AND PERFORMANCE

THIS GUARANTY OF PAYMENT AND PERFORMANCE dated as of September 24, 2014 (this “ Guaranty ” ), is executed by ADCARE HEALTH SYSTEMS, INC. , a Georgia corporation (the “ Guarantor ” ), to and for the benefit of THE PRIVATEBANK AND TRUST COMPANY , an Illinois banking corporation (the “ Lender ” ).
RECITALS

A.      The Lender has agreed to make a loan in the principal amount of $1,500,000 (the “ Loan ” ) to Woodland Manor Nursing, LLC and Glenvue H&R Nursing, LLC, each a Georgia limited liability company (collectively, the “ Borrowers ” ), pursuant to the terms and conditions of a Loan and Security Agreement of even date herewith (the “ Loan Agreement ” ) by and among the Borrowers and the Lender. The Loan is evidenced by a Promissory Note of even date herewith (the “ Note ” ) from the Borrowers to the Lender in the principal amount of $1,500,000. All terms used and not otherwise defined herein shall have the meanings set forth in the Loan Agreement.
B.      As a condition precedent to the making of the Loan to the Borrowers by the Lender and in consideration therefor, the Lender has required the execution and delivery of this Guaranty by the Guarantor.
C.      The purpose of the Loan is to provide working capital financing for the Facilities described in the Loan Agreement. The Guarantor is the owner of 100% of the membership interests in each of the Borrowers either directly or indirectly through one or more intermediary entities, and is also deriving a benefit from the making of the Loan by the Lender.
AGREEMENTS

For good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the Guarantor hereby agrees as follows:
1.      Guaranty of Payment . The Guarantor hereby unconditionally, absolutely and irrevocably guarantees the punctual payment and performance when due, whether at stated maturity or by acceleration or otherwise, of the indebtedness and other obligations of the Borrowers to the Lender evidenced by the Note and any other amounts that may become owing by the Borrowers under the Loan Documents (such indebtedness, obligations and other amounts are hereinafter referred to as the “ Payment Obligations ” ). This Guaranty is a present and continuing guaranty of payment and not of collectability, and the Lender shall not be required to prosecute collection, enforcement or other remedies against the Borrowers, the Guarantor, or any other guarantor of the Payment Obligations, or to enforce or resort to any collateral for the repayment of the Payment Obligations or other rights or remedies pertaining thereto, before calling on the Guarantor for payment. If for any reason the Borrowers shall fail or be unable to pay, punctually and fully, any of the Payment Obligations, the Guarantor shall jointly and

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severally pay such obligations to the Lender in full immediately upon demand. One or more successive actions may be brought against the Guarantor, or any of them, as often as the Lender deems advisable, until all of the Payment Obligations are paid and performed in full. The Payment Obligations and the Performance Obligations (as defined below) are referred to herein as the “ Guaranteed Obligations .”
2.      Guaranty of Performance . In addition to the guaranty of the Payment Obligations, the Guarantor hereby unconditionally, absolutely and irrevocably guarantees, jointly and severally, (i) the full and prompt performance and observance by each Borrower of each and every other obligation, undertaking, liability, promise, warranty, covenant and agreement of each Borrower in and under the terms of the Loan Documents; and (ii) the truth of each and every representation and warranty made by each Borrower in the Loan Documents or in other certificates or documents delivered in connection with the Loan (the matters described in (i) and (ii) above being collectively referred to herein as the “ Performance Obligations ” ).
3.      Representations and Warranties . The following shall constitute representations and warranties of the Guarantor and the Guarantor hereby acknowledges that the Lender intends to make the Loan in reliance thereon:
(a)      The Guarantor is a corporation duly organized, validly existing and in good standing under the laws of the State of Georgia. The Guarantor has full power and authority to conduct its business as presently conducted, to execute and deliver the Loan Documents to which it is a party, and to perform all of its duties and obligations under the Loan Documents to which it is a party; and such execution and performance have been duly authorized by all necessary Legal Requirements. The articles of incorporation and bylaws of the Guarantor, each as amended to date, copies of which have been furnished to the Lender, are in effect, have not been further amended, and are the true, correct and complete documents relating to the Guarantor’s creation and governance.
(b)      The Guarantor is not in default and no event has occurred that with the passage of time or the giving of notice will constitute a default under any agreement to which the Guarantor is a party, the effect of which will impair performance by the Guarantor of its obligations under this Guaranty. Neither the execution and delivery of this Guaranty nor compliance with the terms and provisions hereof will violate any applicable law, rule, regulation, judgment, decree or order, or will conflict with or result in any breach of any of the terms, covenants, conditions or provisions of the articles of incorporation or bylaws of the Guarantor, any indenture, mortgage, deed of trust, instrument, document, agreement or contract of any kind that creates, represents, evidences or provides for any lien, charge or encumbrance upon any of the property or assets of the Guarantor, or any other indenture, mortgage, deed of trust, instrument, document, agreement or contract of any kind to which the Guarantor is a party or to which the Guarantor or the property of the Guarantor may be subject.
(c)      There is no litigation, arbitration, governmental or administrative proceedings, actions, examinations, claims or demands pending, or to the Guarantor’s knowledge, threatened that could adversely affect performance by the Guarantor of its obligations under this Guaranty.

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(d)      Neither this Guaranty nor any statement or certification as to facts previously furnished or required herein to be furnished to the Lender by the Guarantor, contains any material inaccuracy or untruth in any representation, covenant or warranty or omits to state a fact material to this Guaranty.
4.      Continuing Guaranty . The Guarantor agrees that performance by the Guarantor of its obligations under this Guaranty shall be a primary obligation, shall not be subject to any counterclaim, set‑off, abatement, deferment or defense based upon any claim that the Guarantor may have against the Lender, any Borrower, any other guarantor of the Guaranteed Obligations or any other person or entity, and shall remain in full force and effect without regard to, and shall not be released, discharged or affected in any way by, any circumstance or condition (whether or not the Guarantor shall have any knowledge thereof), including without limitation --
(a)      Any lack of validity or enforceability of any of the Loan Documents;
(b)      Any termination, amendment, modification or other change in any of the Loan Documents, including, without limitation, any modification of the interest rate or rates described therein;
(c)      Any furnishing, exchange, substitution or release of any collateral securing repayment of the Loan, or any failure to perfect any lien in such collateral;
(d)      Any failure, omission or delay on the part of any Borrower, the Guarantor, any other guarantor of the Guaranteed Obligations or the Lender to conform or comply with any term of any of the Loan Documents or any failure of the Lender to give notice of any Event of Default;
(e)      Any waiver, compromise, release, settlement or extension of time of payment or performance or observance of any of the obligations or agreements contained in any of the Loan Documents;
(f)      Any action or inaction by the Lender under or in respect of any of the Loan Documents, any failure, lack of diligence, omission or delay on the part of the Lender to perfect, enforce, assert or exercise any lien, security interest, right, power or remedy conferred on it in any of the Loan Documents, or any other action or inaction on the part of the Lender;
(g)      Any voluntary or involuntary bankruptcy, insolvency, reorganization, arrangement, readjustment, assignment for the benefit of creditors, composition, receivership, liquidation, marshalling of assets and liabilities or similar events or proceedings with respect to any Borrower, the Guarantor or any other guarantor of the Guaranteed Obligations, as applicable, or any of their respective property or creditors, or any action taken by any trustee or receiver or by any court in any such proceeding;
(h)      Any merger or consolidation of any Borrower into or with any entity, or any sale, lease or transfer of any of the assets of any Borrower, the Guarantor or any other guarantor of the Guaranteed Obligations to any other person or entity;

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(i)      Any change in the ownership of any Borrower, or any change in the relationship between any Borrower and the Guarantor or any other guarantor of the Guaranteed Obligations, or any termination of any such relationship;
(j)      Any release or discharge by operation of law of any Borrower, the Guarantor or any other guarantor of the Guaranteed Obligations from any obligation or agreement contained in any of the Loan Documents; or
(k)      Any other occurrence, circumstance, happening or event, whether similar or dissimilar to the foregoing and whether foreseen or unforeseen, which otherwise might constitute a legal or equitable defense or discharge of the liabilities of a guarantor or surety or which otherwise might limit recourse against any Borrower or the Guarantor to the fullest extent permitted by law.
5.      Waivers . The Guarantor expressly and unconditionally waives (i) notice of any of the matters referred to in Section 4 above, (ii) all notices which may be required by statute, rule of law or otherwise, now or hereafter in effect, to preserve intact any rights against the Guarantor, including, without limitation, any demand, presentment and protest, proof of notice of non‑payment under any of the Loan Documents and notice of any Event of Default or any failure on the part of any Borrower, the Guarantor or any other guarantor of the Guaranteed Obligations to perform or comply with any covenant, agreement, term or condition of any of the Loan Documents, (iii) any right to the enforcement, assertion or exercise against any Borrower, the Guarantor or any other guarantor of the Guaranteed Obligations of any right or remedy conferred under any of the Loan Documents, (iv) any requirement of diligence on the part of any person or entity, (v) to the fullest extent permitted by law and except as otherwise expressly provided in this Guaranty or the other Loan Documents, any claims based on allegations that the Lender has failed to act in a commercially reasonable manner or failed to exercise the Lender’s obligation of good faith and fair dealing, (vi) any requirement to exhaust any remedies or to mitigate the damages resulting from any default under any of the Loan Documents, and (vii) any notice of any sale, transfer or other disposition of any right, title or interest of the Lender under any of the Loan Documents. The Guarantor agrees that it is a guarantor and not a “surety” within the meaning of the Illinois Sureties Act, and also waives any and all rights under the Illinois Sureties Act.
6.      Subordination . The Guarantor agrees that any and all present and future debts and obligations of any Borrower to the Guarantor hereby are subordinated to the claims of the Lender and hereby are assigned by the Guarantor to the Lender as security for the Guaranteed Obligations and the Guarantor’s obligations under this Guaranty.
7.      Subrogation Waiver . Until the Guaranteed Obligations are paid in full and all periods under applicable bankruptcy law for the contest of any payment by the Guarantor or the Borrowers as a preferential or fraudulent payment have expired, the Guarantor knowingly, and with advice of counsel, waives, relinquishes, releases and abandons all rights and claims to indemnification, contribution, reimbursement, subrogation and payment which the Guarantor may now or hereafter have by and from any Borrower and the successors and assigns of any Borrower, for any payments made by the Guarantor to the Lender, including, without limitation, any rights which might allow any Borrower, any Borrower’s successors, a creditor of any

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Borrower, or a trustee in bankruptcy of any Borrower to claim in bankruptcy or any other similar proceedings that any payment made by any Borrower or any Borrower’s successors and assigns to the Lender was on behalf of or for the benefit of the Guarantor and that such payment is recoverable by any Borrower, a creditor or trustee in bankruptcy of any Borrower as a preferential payment, fraudulent conveyance, payment of an insider or any other classification of payment which may otherwise be recoverable from the Lender.
8.      Reinstatement . The obligations of the Guarantor pursuant to this Guaranty shall continue to be effective or automatically be reinstated, as the case may be, if at any time payment of any of the Guaranteed Obligations or the Guarantor’s obligations under this Guaranty are rescinded or otherwise must be restored or returned by the Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Guarantor or any Borrower or otherwise, all as though such payment had not been made.
9.      Financial Statements . The Guarantor represents and warrants to the Lender that (i) the financial statements of the Guarantor previously submitted to the Lender are true, complete and correct in all material respects, disclose all actual and contingent liabilities, and fairly present the financial condition of the Guarantor, and do not contain any untrue statement of a material fact or omit to state a fact material to the financial statements submitted or this Guaranty, and (ii) no material adverse change has occurred in the financial statements from the dates thereof until the date hereof. The Guarantor shall furnish to the Lender financial statements and other information as provided in Section 7.3 of the Loan Agreement.
10.      Transfers, Sales, Etc. The Guarantor shall not sell, lease, transfer, convey or assign any of its assets, unless (i) if the Guarantor is a natural person, such sale, lease, transfer, conveyance or assignment is of a non-material asset of the Guarantor and will not have a material adverse effect on the Guarantor’s financial condition or (ii) if the Guarantor is a limited liability company, corporation, partnership or other entity, such sale, lease, transfer, conveyance or assignment will not have a material adverse effect on the business or financial condition of the Guarantor or its ability to perform its obligations hereunder.
11.      Default; Remedies . An Event of Default shall occur hereunder if the Guarantor shall fail to pay or perform any of its covenants, agreements and obligations hereunder, or if any representation or warranty contained herein shall prove to be untrue or incorrect in any material respect. When any Event of Default hereunder has occurred and is continuing, the Lender may exercise any of the rights and remedies provided for herein or in any of the other Loan Documents, or provided to it by law, including, without limitation, the right of setoff.
12.      Enforcement Costs and Interest . If: (i) this Guaranty, is placed in the hands of one or more attorneys for collection or is collected through any legal proceeding; (ii) one or more attorneys is retained to represent the Lender in any bankruptcy, reorganization, receivership or other proceedings affecting creditors’ rights and involving a claim under this Guaranty, or (iii) one or more attorneys is retained to represent the Lender in any other proceedings whatsoever in connection with this Guaranty, then the Guarantor shall pay to the Lender upon demand all fees, costs and expenses incurred by the Lender in connection therewith, including, without limitation, reasonable attorney’s fees, court costs and filing fees , in addition to all other

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amounts due hereunder. Amounts due from the Guarantor under this Guaranty shall bear interest until paid at the Default Rate.
13.      Successors and Assigns; Joint and Several Liability . This Guaranty shall inure to the benefit of the Lender and its successors and assigns. This Guaranty shall be binding on the Guarantor and the heirs, legatees, successors and assigns of the Guarantor. If this Guaranty is executed by more than one Guarantor, it shall be the joint and several undertaking of each of the undersigned. Regardless of whether this Guaranty is executed by more than one Guarantor, it is agreed that the liability of the undersigned hereunder is several and independent of any other guarantees or other obligations at any time in effect with respect to the Guaranteed Obligations or any part thereof and that the liability of the Guarantor hereunder may be enforced regardless of the existence, validity, enforcement or non‑enforcement of any such other guarantees or other obligations.
14.      No Waiver of Rights . No delay or failure on the part of the Lender to exercise any right, power or privilege under this Guaranty or any of the other Loan Documents shall operate as a waiver thereof, and no single or partial exercise of any right, power or privilege shall preclude any other or further exercise thereof or the exercise of any other power or right, or be deemed to establish a custom or course of dealing or performance between the parties hereto. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law. No notice to or demand on the Guarantor in any case shall entitle the Guarantor to any other or further notice or demand in the same, similar or other circumstance.
15.      Prior Agreements; No Reliance; Modification . This Guaranty shall represent the entire, integrated agreement between the parties hereto relating to the subject matter hereof, and shall supersede all prior negotiations, representations or agreements pertaining thereto, either oral or written. The Guarantor acknowledges that it is executing this Guaranty without relying on any statements, representations or warranties, either oral or written, that are not expressly set forth herein. The terms of this Guaranty may be waived, discharged, or terminated only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. No amendment, modification, waiver or other change of any of the terms of this Guaranty shall be effective without the prior written consent of the Lender.
16.      Joinder . Any action to enforce this Guaranty may be brought against the Guarantor without any joinder of any Borrower, or any other guarantor of the Guaranteed Obligations in such action.
17.      Incorporation of Recitals . The Recitals to this Guaranty are hereby incorporated into and made a part of this Guaranty.
18.      Severability . If any provision of this Guaranty is deemed to be invalid by reason of the operation of law, or by reason of the interpretation placed thereon by any administrative agency or any court, the Guarantor and the Lender shall negotiate an equitable adjustment in the provisions of the same in order to effect, to the maximum extent permitted by law, the purpose of this Guaranty and the validity and enforceability of the remaining provisions, or portions or applications thereof, shall not be affected thereby and shall remain in full force and effect.

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19.      Applicable Law . This Guaranty is governed as to validity, interpretation, effect and in all other respects by laws and decisions of the State of Illinois.
20.      Captions . The captions and headings of various Sections of this Guaranty pertaining hereto are for convenience only and are not to be considered as defining or limiting in any way the scope or intent of the provisions hereof.
21.      Execution of Counterparts; Electronic Signatures . This Guaranty may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same document. Receipt of an executed signature page to this Guaranty by facsimile or other electronic transmission shall constitute effective delivery thereof. An electronic record of this executed Guaranty maintained by the Lender shall be deemed to be an original.
22.      Construction . Each party to this Guaranty and legal counsel to each party have participated in the drafting of this Guaranty, and accordingly the general rule of construction to the effect that any ambiguities in a contract are to be resolved against the party drafting the contract shall not be employed in the construction and interpretation of this Guaranty.
23.      Notice . All notices and other communications provided for in this Guaranty ( “ Notices ” ) shall be in writing. The “ Notice Addresses ” of the parties for purposes of this Guaranty are as follows:
Guarantor:
 
AdCare Health Systems, Inc.
1145 Hembree Road
Roswell, Georgia 30076
Attention: David A. Tenwick, CEO
With a copy to:
 
Holt Ney Zatcoff & Wasserman, LLP
100 Galleria Parkway, Suite 1800
Atlanta, Georgia 30339
Attention: Gregory P. Youra
Lender:
 
The PrivateBank and Trust Company
120 South LaSalle Street
Chicago, Illinois 60603
Attention: Amy K. Hallberg
With a copy to:
 
Seyfarth Shaw LLP
131 South Dearborn Street
Suite 2400
Chicago, Illinois 60603
Attention: Alvin L. Kruse

or such other address as a party may designate by notice duly given in accordance with this Section to the other parties. A Notice to a party shall be effective when delivered to such party’s

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Notice Address by any means, including, without limitation, personal delivery by the party giving the Notice, delivery by United States regular, certified or registered mail, or delivery by a commercial courier or delivery service. If the Notice Address of a party includes a facsimile number or electronic mail address, Notice given by facsimile or electronic mail shall be effective when delivered at such facsimile number or email address. If delivery of a Notice is refused, it shall be deemed to have been delivered at the time of such refusal of delivery. The party giving a Notice shall have the burden of establishing the fact and date of delivery or refusal of delivery of a Notice.
24.      Litigation Provisions .
(a)      THE GUARANTOR CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN CHICAGO, ILLINOIS, AND OF ANY STATE OR FEDERAL COURT LOCATED OR HAVING JURISDICTION IN THE COUNTY IN WHICH ANY FACILITY IS LOCATED, IN WHICH ANY LEGAL PROCEEDING MAY BE COMMENCED OR PENDING RELATING IN ANY MANNER TO THIS GUARANTY.
(b)      THE GUARANTOR AGREES THAT ANY LEGAL PROCEEDING RELATING TO THIS GUARANTY MAY BE BROUGHT AGAINST THE GUARANTOR IN ANY STATE OR FEDERAL COURT LOCATED IN CHICAGO, ILLINOIS, OR ANY STATE OR FEDERAL COURT LOCATED OR HAVING JURISDICTION IN THE COUNTY IN WHICH ANY FACILITY IS LOCATED. THE GUARANTOR WAIVES ANY OBJECTION TO VENUE IN ANY SUCH COURT AND WAIVES ANY RIGHT THE GUARANTOR MAY HAVE TO TRANSFER OR CHANGE THE VENUE FROM ANY SUCH COURT.
(c)      THE GUARANTOR AGREES THAT THE GUARANTOR WILL NOT COMMENCE ANY LEGAL PROCEEDING AGAINST THE LENDER RELATING IN ANY MANNER TO THIS GUARANTY IN ANY COURT OTHER THAN A STATE OR FEDERAL COURT LOCATED IN CHICAGO, ILLINOIS, OR IF A LEGAL PROCEEDING IS COMMENCED BY THE LENDER AGAINST THE GUARANTOR IN A COURT IN ANOTHER LOCATION, BY WAY OF A COUNTERCLAIM IN SUCH LEGAL PROCEEDING.
(d)      THE GUARANTOR HEREBY WAIVES TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATING TO THIS GUARANTY.
25.      Eligible Contract Participant Savings Clause . Notwithstanding anything herein to the contrary, the obligations of a Guarantor hereunder shall not include any obligation to pay or perform the obligations of another person or entity under any agreement, contract or transaction that constitutes a “swap” within the meaning of Section 1a(47) of the Commodity Exchange Act if and only to the extent that the guarantee of such Guarantor of, or the grant by such Guarantor of a security interest to secure, such obligation is or becomes illegal under the Commodity Exchange Act or any rule, regulation or order of the Commodity Futures Trading Commission (or the application or official interpretation thereof) by virtue of such Guarantor’s failure for any reason to constitute an “eligible contract participant” as defined in the Commodity

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Exchange Act and the regulations thereunder at the time the guarantee of such Guarantor or the grant of such security interest becomes effective with respect to such obligation.

[SIGNATURE PAGE(S) AND EXHIBIT(S),
IF ANY, FOLLOW THIS PAGE]


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IN WITNESS WHEREOF , the Guarantor has executed this Guaranty as of the date first above written.


ADCARE HEALTH SYSTEMS, INC.
 
 
By
/s/ Ronald W. Fleming
 
Ronald W. Fleming, Chief Financial Officer


- AdCare/Woodland/Glenvue HUD Operator Loan Guaranty -
- Signature Page -

Exhibit 10.21
17633157.5     
09-10-14




 




LOAN AND SECURITY AGREEMENT

Dated as of September 24, 2014

by and among

WOODLAND MANOR NURSING, LLC ,
and GLENVUE H&R NURSING, LLC , each a Georgia limited liability company,
as Borrowers

and

THE PRIVATEBANK AND TRUST COMPANY ,
an Illinois banking corporation,
as Lender


 



















TABLE OF CONTENTS

Article                                                                                                                                          Page
 
 
 
ARTICLE 1 INCORPORATION AND DEFINITIONS
1

1.1.
Incorporation and Definitions.
1

1.2.
Other Terms Defined in Code
8

 
 
 
ARTICLE 2 REPRESENTATIONS AND WARRANTIES
8

2.1.
Representations and Warranties
8

2.2.
Continuation of Representations and Warranties
13

 
 
 
ARTICLE 3 THE LOAN
13

3.1.
Agreement to Lend
13

3.2.
Interest
13

3.3.
Principal Payments; Maturity Date
14

3.4.
Uniform Commercial Code Matters
14

 
 
 
ARTICLE 4 LOAN DOCUMENTS
15

4.1.
Loan Documents
15

4.2.
Interest Rate Protection
16

 
 
 
ARTICLE 5 LOAN DISBURSEMENTS
16

5.1.
Conditions to Loan Opening and Subsequent Disbursements
17

5.2.
Additional Conditions to Loan Opening and Subsequent Disbursements
17

5.3.
Termination of Agreement
17

 
 
 
ARTICLE 6 PAYMENT OF LOAN EXPENSES
18

6.1.
Payment of Loan Expenses at Loan Opening
18

 
 
 
ARTICLE 7 FURTHER AGREEMENTS OF BORROWER
18

7.1.
Fixtures and Personal Property; Concerning the Lease
18

7.2.
Insurance Policies
19

7.3.
Furnishing Information
20

7.4.
Excess Indebtedness
22

7.5.
Compliance with Laws
22

7.6.
ERISA Liabilities; Employee Plans
22

7.7.
Licensure; Notices of Agency Actions
22

7.8.
Project and Facility Accounts and Revenues
23

7.9.
Single-Asset Entity; Indebtedness; Distributions
23

7.10.
Restrictions on Transfer
24

7.11.
Leasing, Operation and Management of Project
25

7.12.
Debt Service Coverage Ratio
25

7.13.
Fixed Charge Coverage Ratio
25

7.14.
Rental Income Coverage of Debt Service Ratio
26

7.15.
Security Interest Matters
26



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7.16.
Field Audits
26
7.17.
Collateral Records
26
7.18.
Further Assistance
26
 
 
 
ARTICLE 8 SECURITY
27
8.1.
Security for the Loan
27
8.2.
Possession and Transfer of Collateral
28
8.3.
Preservation of the Collateral
28
8.4.
Others Actions as to any and all Collateral
29
8.5.
Collateral in the Possession of a Warehouseman or Bailee
29
8.6.
Letter-of-Credit Rights
29
8.7.
Commercial Tort Claims
29
8.8.
Electronic Chattel paper and Transferable Records
29
8.9.
Directions for Payment of Accounts to Account Lender; Court Order for Payment of Accounts to Lender
30
 
 
 
ARTICLE 9 ASSIGNMENTS, SALE AND ENCUMBRANCES
30
9.1.
Lender's Right to Assign
30
9.2.
Prohibition of Assignments and Encumbrances by Borrowers
30
 
 
 
ARTICLE 10 EVENTS OF DEFAULT BY BORROWER
31
10.1.
Event of Default Defined
31
 
 
 
ARTICLE 11 LENDER'S REMEDIES UPON EVENT OF DEFAULT
33
11.1.
Remedies Conferred upon Lender
33
11.2.
Possession and Assembly of Collateral
34
11.3.
Sale of Collateral
34
11.4.
Standards for Exercising Remedies
35
11.5.
Code and Offset Rights
35
11.6.
Additional Remedies
36
11.7.
Right of Lender to Make Advances to Cure Event of Defaults; Obligatory Advances
37
11.8.
Attorney-in-Fact
37
11.9.
No Marshalling
38
11.10.
Application of Proceeds
38
11.11
Attorneys' Fees
38
11.12.
No Waiver
38
11.13.
Default Rate
39
 
 
 
ARTICLE 12 MISCELLANEOUS
39
12.1.
Time is of the Essence
39
12.2.
Lender's Determination of Facts; Lender Approvals and Consents
39
12.3.
Prior Agreements; No Reliance; Modifications
39
12.4.
Disclaimer by Lender
40
12.5.
Loan Expenses; Indemnification
40
12.6.
Captions
40
12.7.
Inconsistent Terms and Partial Invalidity
40


- ii -

12.8.
Gender and Number
40
12.9.
Notices
41
12.10.
Effect of Agreement
41
12.11.
Refinancing Proposal
41
12.12.
Construction
42
12.13.
Governing Law
42
12.14.
Waiver of Defenses
42
12.15.
Consent to Jurisdiction
42
12.16.
Waiver of Jury Trial
42
12.17.
Counterparts; Facsimile Signatures
43
12.18.
Customer Identification-USA Patriot Act Notice; OFAC and Bank Secrecy Act
43
 
 
 
EXHIBITS
 
EXHIBIT A - DIRECT AND INDIRECT OWNERSHIP OF BORROWERS
 



- iii -


LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT dated as of September 24, 2014 (this “ Agreement ” ), is executed by and among WOODLAND MANOR NURSING, LLC ( “ Borrower 1 ” ) and GLENVUE H&R NURSING, LLC ( “ Borrower 2 ” ), each a Georgia limited liability company (collectively, “ Borrowers ”) and THE PRIVATEBANK AND TRUST COMPANY , an Illinois banking corporation ( “ Lender ” ).
RECITALS

A.      Borrower 1 is the sublessee of “ Project 1 ” (as hereinafter defined), which is improved with a facility containing 113 skilled nursing beds known as Eaglewood Care Center, 2000 Villa Road, Springfield, Clark County, Ohio (“ Facility 1 ” ).
B.      Borrower 2 is the sublessee of “ Project 2 ” (as hereinafter defined), which is improved with a facility containing 160 skilled nursing beds known as Glenvue Health and Rehabilitation, 721 N. Veterans Boulevard, Glennville, Tatnall County, Georgia ( “ Facility 2 ” , and together with Facility 1, the “ Facilities ” ).
C.      Borrowers are the operators of the Facilities and have applied to Lender for the Loan (as hereinafter defined), to provide working capital to Borrowers for the operation of the Facilities, and Lender is willing to make the Loan upon the terms and conditions hereinafter set forth.
D.      Borrower 1 subleases Facility 1 from 2014 HUD Master Tenant, LLC, a Georgia limited liability company, which leases Facility 1 from Woodland Manor Property Holdings, LLC, a Georgia limited liability company ( “ Owner 1 ” ), under the Master Lease (as defined herein).
E.      Borrower 2 subleases Facility 2 from 2014 HUD Master Tenant, LLC, a Georgia limited liability company, which leases Facility 2 from Glenvue H&R Property Holdings, LLC, a Georgia limited liability company ( “ Owner 2 ” ), under the Master Lease (as defined herein).
F.      Each Owner is obtaining a loan for their respective Projects which is insured by the United States Department of Housing and Urban Development ( “ HUD ” ). Borrowers and Lender are including certain provisions in this Agreement, and Lender is entering into certain other agreements which are referred to herein, in order to conform to the requirements of HUD in order to facilitate each Owner’s obtaining the said HUD-insured loan for their respective Projects.
AGREEMENTS

In consideration of the mutual representations, warranties, covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:






ARTICLE 1

INCORPORATION AND DEFINITIONS

1.1      Incorporation and Definitions . The foregoing recitals and all exhibits hereto are hereby made a part of this Agreement. The following terms shall have the following meanings in this Agreement:
AdCare : AdCare Health Systems, Inc., a Georgia corporation
Affiliate : As to a person or entity, any other person or entity which, directly or indirectly, Controls, is Controlled by or is under common Control with such first person or entity.
Agreement : This Loan and Security Agreement by and among Borrowers and Lender.
AR Lender Priority Collateral : As defined in the Intercreditor Agreements.
Availability : At any time, an amount equal to the lesser of (i) the Loan Amount, or (ii) the Borrowing Base Amount.
Borrower 1 : As defined in the Preamble hereto.
Borrower 2 : As defined in the Preamble hereto.
Borrowing Base Amount : An amount equal to 80% of the amount of all Eligible Accounts, minus the amounts of such reserves and allowances as Lender deems proper and necessary, including, without limitation, reserves and allowances for credit amounts in any of the Eligible Accounts categories to provide for amounts that may become due to the Medicare, Medicaid or other payor programs.
Borrowing Base Certificate : A certificate to be signed by Borrowers certifying to the accuracy of the Borrowing Base Amount in form and substance satisfactory to Lender.
Capital Lease : With respect to any party, a lease of any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, by such party, as lessee, that is or should be recorded as a “capital lease” on the financial statements of such party prepared in accordance with GAAP.
Capitalized Lease Obligations : With respect to any party, all rental obligations of such party as lessee under a Capital Lease which are or will be required to be capitalized on the books of such party.
Code : The Uniform Commercial Code of the State of Illinois as from time to time in effect; provided, however, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of, or remedies with respect to, the security interest in any collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of Illinois, the term “Code” shall mean the Uniform Commercial Code as in effect in such


- 2 -


other jurisdiction for purposes of the provisions of this Agreement or the other Loan Documents relating to such attachment, perfection, priority or remedies and for purposes of definitions related to such provisions.
Collateral : As defined in Section 8.1 hereof.
Control : Possession by a person or an entity, directly or indirectly, of the power to direct or cause the direction of the management and policies of an entity, whether by contract, ownership of voting securities, membership or partnership interests or otherwise.
DAISA : A Deposit Account Instructions and Service Agreements dated as of September ___, 2014, between Lender and a Borrower, and all amendments, restatements, supplements and other modifications thereto.
Debt Service : With respect to any party, for any period, the sum of (i) Interest Charges, plus (ii) all amounts payable with respect to that period to a lender in connection with borrowed money, and the portion of the deferred purchase price of assets payable with respect to that period, in each case that are treated as principal in accordance with GAAP, plus (iii) the portion of Capitalized Lease Obligations with respect to that period that is treated as principal in accordance with GAAP, plus (iv) Rental Expense payable with respect to that period under leases which are not Capital Leases.
Declarations : Any documents containing covenants, conditions, restrictions, easements, operating agreements or the like, which benefit or burden the land on which a Facility is located, or both, whether or not recorded.
Default : When used in reference to this Agreement or any other document, or in reference to any provision of or obligation under this Agreement or any other document, the occurrence of an event or the existence of a condition which, with the passage of time or the giving of notice, or both, would constitute an Event of Default under this Agreement or such other document, as the case may be.
Default Rate : As defined in the Note.
Depreciation : With respect to any party, for any period, the total amounts added to depreciation, amortization, obsolescence, valuation and other proper reserves, as reflected on such party’s financial statements for such period and determined in accordance with GAAP.
Distribution : In the case of any entity with respect to which the term is used, any of the following: (i) any dividend or distribution of money or property to any owner of a direct or indirect interest in such entity (each a “ Principal ” ) or to any Affiliate of any Principal, (ii) any loan or advance to any Principal or to any Affiliate of any Principal, (iii) any payment of principal or interest on any indebtedness due to any Principal or to any Affiliate of any Principal, and (iv) any payment of any fees or other compensation to any Principal or to any Affiliate of any Principal.


- 3 -


EBITDA : With respect to any party, for any period, the sum for such period of the following of or payable by such party, as the case may be: (i) Net Income, plus (ii) Interest Charges, plus (iii) federal and state income taxes, plus (iv) Depreciation.
EBITDAR : With respect to any party, for any period, the sum for such period of the following of or payable by such party, as the case may be: (i) Net Income, plus (ii) Interest Charges, plus (iii) federal and state income taxes, plus (iv) Depreciation, plus (v) Rental Expense.
Eligible Account and Eligible Accounts : Each Account and all such Accounts (exclusive of sales, excise or other similar taxes) owing to a Borrower which meets each of the following requirements:
(a)      It is genuine in all respects and has arisen in the ordinary course of such Borrower’s business as occupancy charges and from the performance of services by such Borrower, which services have been fully performed, acknowledged and accepted by the Account Debtor, and sales of Inventory related to such occupancy charges and services;
(b)      It is subject to a perfected, first priority security interest in favor of Lender and is not subject to any other assignment, claim, security interest, lien or encumbrance other than Permitted FHA Liens;
(c)      It is the valid, legally enforceable and unconditional obligation of the Account Debtor with respect thereto, and is not subject to the fulfillment of any condition whatsoever or any counterclaim, credit, trade or volume discount, allowance, discount, rebate or adjustment by the Account Debtor with respect thereto, or to any claim by such Account Debtor denying liability thereunder in whole or in part and the Account Debtor has not refused to accept or has not returned or offered to return any of the Inventory or services which are the subject of such Account; provided, however, that this paragraph shall not apply with respect to the general terms and conditions of the Medicare or the Medicaid program, including the right to recoup prior overpayments from payments due on other claims, as opposed to matters relating to the status of a particular Account due from the Medicare or the Medicaid program;
(d)      The Account Debtor with respect thereto is a resident or citizen of, and is located within, the United States, or is the Medicare or the Medicaid program;
(e)      It is not an Account arising from a “sale on approval”, “sale or return”, “consignment”, “guaranteed sale” or “bill and hold”, or are subject to any other repurchase or return agreement;
(f)      It is not an Account with respect to which possession or control of the goods sold giving rise thereto is held, maintained or retained by such Borrower (or by any agent or custodian of such Borrower) for the account of, or subject to, further or future direction from the Account Debtor with respect thereto;
(g)      It has not arisen out of contracts with the United States or any department, agency or instrumentality thereof, or any state, county, city or other governmental body,


- 4 -


or any department, agency or instrumentality thereof, in each case unless such Borrower has assigned its right to the proceeds of the payment of such Account to Lender in a manner consistent with applicable law governing the assignment of amounts payable under such contracts and the granting of a security interest in such Account;
(h)      If such Borrower maintains a credit limit for an Account Debtor, the aggregate dollar amount of Accounts due from such Account Debtor, including such Account, does not exceed such credit limit;
(i)      If the Account is evidenced by chattel paper or an instrument, the originals of such chattel paper or instrument shall have been endorsed or assigned and delivered to Lender or, in the case of electronic chattel paper, shall be in the control of Lender, in each case in a manner satisfactory to Lender;
(j)      Such Account is not due from a so-called private pay person who is not covered by Medicare, Medicaid or commercial insurance, or from a person who has applied for Medicare or Medicaid benefits but has not yet been approved for such benefits, or has been submitted to but has not yet been approved for payment by Medicare, Medicaid or commercial insurance;
(k)      Such Account is evidenced by an invoice delivered to the related Account Debtor, and is outstanding not more than 120 days past the billing date thereof in the case of Accounts due from the Medicaid program, not more than 120 days past the billing date thereof in the case of Accounts due from the Medicare program, and not more than 120 days past the billing date thereof in the case of all other Accounts;
(l)      It is not an Account with respect to an Account Debtor that is located in any jurisdiction which has adopted a statute or other requirement with respect to which any person that obtains business from within such jurisdiction must file a notice of business activities report or make any other required filings in a timely manner in order to enforce its claims in such jurisdiction’s courts unless (i) such notice of business activities report has been duly and timely filed or such Borrower is exempt from filing such report and has provided Lender with satisfactory evidence of such exemption or (ii) the failure to make such filings may be cured retroactively by such Borrower for a nominal fee;
(m)      The Account Debtor with respect thereto is not a Borrower or an Affiliate of a Borrower;
(n)      Such Account does not arise out of a contract or order which, by its terms, forbids or makes void or unenforceable the assignment thereof by such Borrower to Lender and is not unassignable to Lender for any other reason;
(o)      There is no bankruptcy, insolvency or liquidation proceeding pending by or against the Account Debtor with respect thereto, nor has the Account Debtor suspended business, made a general assignment for the benefit of creditors or failed to pay its debts generally as they come due, or no condition or event has occurred having a material adverse effect on the Account Debtor which would require the Accounts of such Account Debtor to be deemed uncollectible in accordance with GAAP; and


- 5 -


(p)      It does not violate the negative covenants and does satisfy the affirmative covenants of such Borrower contained in this Agreement, and it is otherwise not unacceptable to Lender for any other reason.
An Account which is at any time an Eligible Account, but which subsequently fails to meet any of the foregoing requirements, shall forthwith cease to be an Eligible Account. Further, with respect to any Account, if Lender at any time hereafter determines in its discretion that the prospect of payment or performance by the Account Debtor with respect thereto is materially impaired for any reason whatsoever, such Account shall cease to be an Eligible Account after notice of such determination is given to such Borrower.
Employee Plan : Any pension, stock bonus, employee stock ownership plan, retirement, profit sharing, deferred compensation, stock option, bonus or other incentive plan, whether qualified or nonqualified, or any disability, medical, dental or other health plan, life insurance or other death benefit plan, vacation benefit plan, severance plan or other employee benefit plan or arrangement, including, without limitation, those pension, profit-sharing and retirement plans of any Borrower described from time to time in its financial statements, and any pension plan, welfare plan, Defined Benefit Pension Plans (as defined in ERISA) or multi-employer plan, maintained or administered by any Borrower or to which any Borrower is a party, or under which any Borrower may have any liability, or by which any Borrower may be bound.
Environmental Laws : Any and all federal, state and local laws (whether under common law, statute, rule, regulation or otherwise), requirements under permits or other authorizations issued with respect thereto, and other orders, decrees, judgments, directives or other requirements of any governmental authority relating to or imposing liability or standards of conduct (including disclosure or notification) concerning protection of human health or the environment or Hazardous Substances or any activity involving Hazardous Substances, all as previously and in the future amended from time to time, as the case may be.
ERISA : The Employee Retirement Income Security Act of 1974, as amended.
Event of Default : The following: (i) when used in reference to this Agreement, one or more of the events or occurrences referred to in Section 10.1 of this Agreement; and (ii) when used in reference to any other document, a default or event of default under such document that has continued after the giving of any applicable notice and the expiration of any applicable grace or cure periods.
Facility 1 : As defined in the Preamble.
Facility 2 : As defined in the Preamble.
FHA Mortgagee : Housing & Healthcare Finance, LLC, which is the lender extending the HUD Financing to Owners, and its successors and assigns.
FHA Mortgagee’s Priority Collateral : As defined in the Intercreditor Agreements.
GAAP : Generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified


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Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination, provided, however, that interim financial statements or reports shall be deemed in compliance with GAAP despite the absence of footnotes and fiscal year-end adjustments as required by GAAP.
General Account : The deposit account so designated that is referred to in Section 3.7 of this Agreement.
Governmental AR Account . The deposit account so designated that is referred to in Section 3.7 of this Agreement.
Guarantor : AdCare.
Guaranty : As defined in Section 4.1 hereof.
Hazardous Substance : Any substance, chemical, material or waste (i) the presence of which causes a nuisance or trespass of any kind; ii) which is regulated by any federal, state or local governmental authority because of its toxic, flammable, corrosive, reactive, carcinogenic, mutagenic, infectious, radioactive, or other hazardous property or because of its effect on the environment, natural resources or human health and safety, including, but not limited to, petroleum and petroleum products, asbestos containing materials, polychlorinated biphenyls, lead and lead based paint, radon, radioactive materials, flammables and explosives; or (iii) which is designated, classified, or regulated as being a hazardous or toxic substance, material, pollutant, waste (or a similar such designation) under any federal, state or local law, regulation or ordinance, including under any Environmental Law such as the Comprehensive Environmental Response Compensation and Liability Act (42 U.S.C. §9601 et seq.), the Emergency Planning and Community Right to Know Act (42 U.S.C. §11001 et seq.), the Hazardous Substances Transportation Act (49 U.S.C. §1801 et seq.), or the Clean Air Act (42 U.S.C. §7401 et seq.).
HUD : The United States Department of Housing and Urban Development.
HUD Financing : The financing to Owners for the Projects, which is insured by HUD, which is referred to in the Intercreditor Agreements.
Intercreditor Agreement 1 : The Intercreditor Agreement dated as of September ____, 2014, by and among Lender, FHA Mortgagee, Owner 1 and Borrower 1, and consented to by Landlord as the tenant under the Master Lease, and all amendments, restatements, supplements and other modifications thereto.
Intercreditor Agreement 2 : The Intercreditor Agreement dated as of September ____, 2014, by and among Lender, FHA Mortgagee, Owner 2 and Borrower 2, and consented to by Landlord as the tenant under the Master Lease, and all amendments, restatements, supplements and other modifications thereto.
Intercreditor Agreements : Intercreditor Agreement 1 and Intercreditor Agreement 2, collectively.


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Interest Charges : With respect to any party, for any period, the sum of: (i) all interest, charges and related expenses payable with respect to that period to a lender in connection with borrowed money, and the portion of the deferred purchase price of assets payable with respect to that period, in each case that are treated as interest in accordance with GAAP, plus (ii) the portion of Capitalized Lease Obligations with respect to that period that is treated as interest in accordance with GAAP, plus (iii) all charges paid or payable (without duplication) during that period with respect to any hedging agreements.
Landlord : 2014 HUD Master Tenant, LLC, a Georgia limited liability company
Lease 1 : The Facility Sub-Lease dated as of September 24, 2014, by and between Landlord, as Lessor, and Borrower 1, as Lessee, as amended by that certain HUD Addendum to Operating Lease dated as of September 24, 2014.
Lease 2 : The Facility Sub-Lease dated as of September 24, 2014, by and between Landlord, as Lessor, and Borrower 2, as Lessee, as amended by that certain HUD Addendum to Operating Lease dated as of September 24, 2014.
Leases : Lease 1 and Lease 2, colletively.
Legal Requirements : As to any person or party, the organizational and governing documents of such person or party, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other governmental authority, in each case applicable to or binding upon such person or party or any of its property or to which such person or party or any of its property is subject.
Lessee Rent Account : A deposit account in the name of a Borrower at Lender, into which Lender shall make certain disbursements of the Loan at the request of such Borrower as provided in this Agreement, provided that such Borrower is entitled to such disbursements at the time of such request under the terms, provisions and conditions of this Agreement, and in which FHA Mortgagee shall have a first priority security interest and in which Lender shall have no security interest or right of setoff.
Lender : The PrivateBank and Trust Company, an Illinois banking corporation.
Loan : The loan to be made pursuant to this Agreement.
Loan Amount : $1,500,000.
Loan Documents : This Agreement, the documents specified in Article 4 hereof and any other instruments evidencing, securing or guarantying obligations of any party under the Loan, and during the time that the HUD Financing is in effect, the Intercreditor Agreements, and all amendments, restatements, supplements and other modifications to the foregoing.
Loan Expenses : All interest, charges, costs and expenses incurred by Lender in connection with the Loan, including, but not limited to, (i) interest due on the Loan and any points, loan fees, service charges, commitment fees or other fees due to Lender in connection with the Loan; (ii) all


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title examination, survey, escrow, filing, search, recording and registration fees and charges; (iii) all fees and disbursements of architects, engineers and consultants engaged by any Borrower and Lender; (iv) all documentary stamp and other taxes and charges imposed by law on the issuance or recording of any of the Loan Documents; (v) all appraisal fees; (vi) all title, casualty, liability, payment, performance or other insurance or bond premiums; (vii) all reasonable fees and disbursements of legal counsel engaged by Lender in connection with the Loan, including, without limitation, counsel engaged in connection with the origination, negotiation, document preparation, consummation, enforcement or administration of this Agreement or any of the Loan Documents; and (viii) any amounts required to be paid by any Borrower under this Agreement or any Loan Document after the occurrence of an Event of Default under this Agreement or any of the other Loan Documents.
Loan Opening : The first disbursement of Loan Proceeds.
Loan Proceeds : All amounts advanced as part of the Loan, whether advanced directly to Borrowers or otherwise.
Master Lease : The Master Lease Agreement dated as of September 24, 2014, by and between Owner 1 and Owner 2, each as Lessor, and Landlord, as Lessee, as amended by that certain HUD Master Lease Addendum dated as of September 24, 2014, and which may from time to time include one or more additional facility owners as Lessor.
Maturity Date : September 24, 2017
Net Income : With respect to any party, for any period, the net income (or loss) of such party for such period as determined in accordance with GAAP, excluding any gains from dispositions of assets, any extraordinary gains and any gains from discontinued operations.
Note : As defined in Section 4.1 hereof.
Owner 1 : Woodland Manor Property Holdings, LLC, a Georgia limited liability company.
Owner 2 : Glenvue H&R Property Holdings, LLC, a Georgia limited liability company.
Owners : Owner 1 and Owner 2, collectively.
Payroll Account : The deposit account so designated that is referred to in Section 3.7 of this Agreement.
Permitted FHA Liens : Liens and security interests in favor of FHA Mortgagee which are described in Section 3.7 of this Agreement, including, without limitation, liens, security interests, encumbrances and assignments under any related mortgage and security agreement, Uniform Commercial Code financing statements and regulatory agreements in favor of HUD.
Permitted Substance : Substances used by any Borrower, Landlord or any Owner in the ordinary course of its business, or by any Borrower, Landlord, any Owner and their contractors and subcontractors in the course of construction on or at any Facility or any Project, including, without


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limitation, medical waste, and in the case of all of the foregoing, used in compliance with all Environmental Laws.
Prohibited Transfer : As defined in Section 7.10 hereof.
Project : With respect to each Facility, the land, building and other improvements on and within which such Facility is located.
Rental Expense : With respect to any party, for any period, the rental expense for real estate leased by such party as lessee for such period as determined in accordance with GAAP.
Signing Entity : Each entity (other than a Borrower itself) that appears in the signature block of any Borrower in this Agreement, if any.
State : In the case of each Facility, the State in which such Facility is located.
1.2      Other Terms Defined in Code . All other capitalized words and phrases used herein and not otherwise specifically defined herein shall have the respective meanings assigned to such terms in the Code, to the extent the same are used or defined therein.

ARTICLE 2

REPRESENTATIONS AND WARRANTIES

2.1      Representations and Warranties . To induce Lender to execute and perform this Agreement, each Borrower hereby represents, covenants and warrants to Lender as follows:
(a)      Each Borrower is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Georgia, and if such State is not the State in which its Facility is located such Borrower is duly registered or qualified to transact business and in good standing in the State in which its Facility is located. Each Borrower has full power and authority to conduct its business as presently conducted, to lease and operate its Facility, to enter into this Agreement and to perform all of its duties and obligations under this Agreement and under the Loan Documents, all of which has been duly authorized by all necessary Legal Requirements applicable to such Borrower. Each Signing Entity is duly organized, validly existing and in good standing under the laws of the State in which it is organized, has full power and authority to conduct its business as presently conducted and to execute this Agreement and the other Loan Documents to which the applicable Borrower is a party in the capacity shown in the signature block of the applicable Borrower contained in this Agreement, and such execution has been duly authorized by all necessary Legal Requirements applicable to such Signing Entity. Neither any Borrower nor Guarantor has been convicted of a felony and there are no proceedings or investigations being conducted involving criminal activities of any Borrower or Guarantor. The direct and indirect ownership of each Borrower is as shown in Exhibit B attached to this Agreement.


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(b)      AdCare is a corporation duly organized, validly existing and in good standing under the laws of the State of Georgia. AdCare has full power and authority to conduct its business as presently conducted, and to enter into and to perform the Guaranty and the other Loan Documents to which it is a party and to perform all of its duties and obligations thereunder, all of which has been duly authorized by all necessary Legal Requirements applicable to AdCare.
(c)      Each Borrower and Guarantor is able to pay its debts as such debts become due, and each has capital sufficient to carry on its respective present businesses and transactions and all businesses and transactions in which it is about to engage. Neither any Borrower nor Guarantor (i) is bankrupt or insolvent, (ii) has made an assignment for the benefit of its respective creditors, (iii) has had a trustee or receiver appointed, (iv) has had any bankruptcy, reorganization or insolvency proceedings instituted by or against it, or (v) shall be rendered insolvent by its execution, delivery or performance of the Loan Documents or by the transactions contemplated thereunder. There is no Uniform Commercial Code financing statement on file that names any Borrower or Guarantor as debtor and covers any of the collateral for the Loan, other than the Uniform Commercial Code financing statements on file in the Uniform Commercial Code records of the Office of the Clerk of the Superior Court of any county in the State of Georgia naming Lender as secured party and the Uniform Commercial Code financing statements on file in the Uniform Commercial Code records of the Office of the Clerk of the Superior Court of any county in the State of Georgia naming FHA Mortgagee and the Secretary of Housing and Urban Development as secured parties. There is no judgment or tax lien outstanding against any Borrower or Guarantor.
(d)      This Agreement, the Note, the other Loan Documents and any other documents and instruments required to be executed and delivered by any Borrower or Guarantor in connection with the Loan, when executed and delivered, will constitute the duly authorized, valid and legally binding obligations of the party required to execute the same and will be enforceable strictly in accordance with their respective terms (except to the extent that enforceability may be affected or limited by applicable bankruptcy, insolvency and other similar debtor relief laws affecting the enforcement of creditors’ rights generally); and no basis exists for any claim against Lender under this Agreement, under the Loan Documents or with respect to the Loan; and enforcement of this Agreement and the Loan Documents is subject to no defenses of any kind.
(e)      The execution, delivery and performance of this Agreement, the Note, the other Loan Documents and any other documents or instruments to be executed and delivered by any Borrower or Guarantor pursuant to this Agreement or in connection with the Loan and the use and occupancy of any Facility will not: (i) violate any Legal Requirements applicable to any Borrower, any Signing Entity or Guarantor, or (ii) conflict with, be inconsistent with, or result in any breach or default of any of the terms, covenants, conditions or provisions of any indenture, mortgage, deed of trust, instrument, document, agreement or contract of any kind to which any Borrower, Guarantor or any Signing Entity is a party or by which any of them may be bound. Neither any Borrower, Guarantor nor any Signing Entity is in default (without regard to grace or cure periods) under any contract or agreement


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to which it is a party, the effect of which default will adversely affect the performance by any Borrower or Guarantor of its obligations pursuant to and as contemplated by the terms and provisions of this Agreement or the other Loan Documents.
(f)      No condition, circumstance, event, agreement, document, instrument, restriction, litigation or proceeding, or threatened litigation or proceeding or basis therefor, exists which could (i) adversely affect the validity or priority of the liens and security interests granted Lender under the Loan Documents; (ii) materially adversely affect the ability of any Borrower or Guarantor to perform their obligations under the Loan Documents; or (iii) constitute a Default or Event of Default under this Agreement or any of the other Loan Documents.
(g)      It is a condition of this Agreement and the Loan that each Facility and the use and occupancy of each Facility do not violate or conflict with any applicable law, statute, ordinance, rule, regulation or order of any kind, including, without limitation, Environmental Laws, zoning, building, land use, noise abatement, occupational health and safety or other laws, any building permit or any Declarations, and if a third‑party is required under any Declarations or other documents, to consent to the use or operation of such Facility, the Borrower which is the lessee thereof has obtained such approval from such party, and to the best of Borrowers’ knowledge, such condition is satisfied. In addition, and without limiting the foregoing, each Borrower shall (i) ensure that no person or entity which owns a controlling interest in or otherwise controls such Borrower is or shall be listed on the Specially Designated Nationals and Blocked Person List or other similar lists maintained by the Office of Foreign Assets Control ( “ OFAC ” ), the Department of the Treasury or included in any Executive Orders, (ii) not use or permit the use of any Loan Proceeds to violate any of the foreign asset control regulations of OFAC or any enabling statute or Executive Order relating thereto, and (iii) comply with all applicable Bank Secrecy Act laws and regulations, as amended.
(h)      Each of the following is a condition of this Agreement and the Loan: Except as disclosed in writing to the Lender, including, without limitation, in any environmental site assessment delivered to Lender, the Facilities have never been used for any activities which, directly or indirectly, involve the use, generation, treatment, storage, transportation or disposal of any Hazardous Substances other than Permitted Substances, and no Hazardous Substances other than Permitted Substances exist on the Facilities or under the Facilities or in any surface waters or groundwaters on or under the Facilities. The Facilities and their existing and prior uses have at all times complied with and will comply with all Environmental Laws, and Borrowers have not violated any Environmental Laws. To the best of Borrowers’ knowledge, each of such conditions is satisfied.
(i)      There are no facilities on any Facility which are subject to reporting under any State laws or Section 312 of the Federal Emergency Planning and Community Right‑to‑Know Act of 1986 (42 U.S.C. Section 11022), and federal regulations promulgated thereunder. Except as disclosed in writing to Lender, including, without limitation, in any environmental site assessment delivered to Lender, each Facility does not contain any underground or above ground storage tanks.


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(j)      All financial statements submitted by any Borrower or Guarantor to Lender in connection with the Loan are true and correct in all material respects, have been prepared in accordance with GAAP consistently applied, and fairly present the respective financial conditions and results of operations of the entities and persons which are their subjects.
(k)      This Agreement and all financial statements, budgets, schedules, opinions, certificates, confirmations, applications, rent rolls, affidavits, agreements, and other materials submitted to Lender in connection with or in furtherance of this Agreement by or on behalf of any Borrower or Guarantor fully and fairly state the matters with which they purport to deal, and neither misstate any material fact nor, separately or in the aggregate, fail to state any material fact necessary to make the statements made not misleading in any material respect.
(l)      All utility and municipal services required for the construction, occupancy and operation of each Facility, including, but not limited to, water supply, storm and sanitary sewage disposal systems, cable services, gas, electric and telephone facilities are available for use by and currently provide service to such Facility.
(m)      All governmental permits and licenses required by applicable law in order for (i) the applicable Owners to own and lease their Projects to Landlord under the Master Lease, (ii) Landlord to sublease the applicable Projects to Borrowers under the Leases, and (iii) each Borrower to operate its Facility, have been validly issued and are in full force.
(n)      Each of the following is a condition of this Agreement and the Loan: The storm and sanitary sewage disposal system, water system, drainage system and all mechanical systems of each Facility comply with all applicable laws, statutes, ordinances, rules and regulations, including, without limitation, all Environmental Laws. The applicable environmental protection agency, pollution control board and/or other governmental agencies having jurisdiction of such Facility have issued their permits for the construction, tap‑on and operation of those systems. To the best of Borrowers’ knowledge, each of such conditions is satisfied.
(o)      It is a condition of this Agreement and the Loan that all utility, parking, access (including curb‑cuts and highway access), construction, recreational and other permits and easements required for the use of each Facility have been granted and issued, and to the best of Borrowers’ knowledge, such condition is satisfied.
(p)      The Loan, including interest rate, fees and charges as contemplated hereby, is a “business loan” within the meaning of subparagraph (1)(c) contained in Section 205/4 of Chapter 815 of the Illinois Compiled Statutes, as amended; the Loan is an exempted transaction under the Truth In Lending Act, 12 U.S.C. §1601 et seq.; and the Loan does not, and when disbursed will not, violate the provisions of the usury laws of the State, any consumer credit laws or the usury laws of any state which may have jurisdiction over this transaction, any Borrower or any property securing the Loan.


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(q)      Each Lease is in full force and effect and no Defaults or Events of Default on the part of the applicable Borrower have occurred and are continuing thereunder. Each Master Lease is in full force and effect and no Defaults or Events of Default on the part of Landlord have occurred and are continuing thereunder.
(r)      All Employee Plans of each Borrower meet the minimum funding standards of Section 302 of ERISA and 412 of the Internal Revenue Code where applicable, and each such Employee Plan that is intended to be qualified within the meaning of Section 401 of the Internal Revenue Code of 1986 is qualified. No withdrawal liability has been incurred under any such Employee Plans and no “Reportable Event” or “Prohibited Transaction” (as such terms are defined in ERISA), has occurred with respect to any such Employee Plans, unless approved by the appropriate governmental agencies. Each Borrower has promptly paid and discharged all obligations and liabilities arising under ERISA of a character which if unpaid or unperformed might result in the imposition of a lien against any of its properties or assets.
(s)      Each of the following is a condition of this Agreement and the Loan: There are no strikes, lockouts or other labor disputes pending or threatened against any Borrower, hours worked by and payment made to employees of any Borrower have not been in violation of the Fair Labor Standards Act or any other applicable law, and no unfair labor practice complaint is pending or threatened against any Borrower before any governmental authority. To the best of Borrowers’ knowledge, each of such conditions is satisfied.
(t)      Each Facility has all necessary licenses, permits and certifications required by any applicable governmental authority to operate and maintain a skilled nursing facility therein with its current number of beds in service, and participates in the Medicare and Medicaid programs. Each Borrower has complied with all applicable requirements of the United States of America, the State having jurisdiction over its Facility and all applicable local governments, and of its agencies and instrumentalities, necessary to operate and maintain its Facility as such a facility. All utilities necessary for use, operation and occupancy of each Project and each Facility are available to such Project and such Facility. All requirements for unrestricted use of each Project and each Facility as a skilled nursing facility under the rules and regulations of each department and agency of the State having jurisdiction over such Project or such Facility, have been fulfilled. All building, zoning, safety, health, fire, water district, sewerage and environmental protection agency and any other permits or licenses which are required by any governmental authority for use, occupancy and operation of each Project and each Facility as a skilled nursing facility have been obtained and are in full force and effect. Neither any Borrower, any Owner, Landlord, any Facility, any Project nor Guarantor is subject to any corporate integrity agreement, compliance agreement or other agreement governing the operation of any Project or any Facility or the operations of any Borrower, any Owner, Landlord or Guarantor (however, Borrowers, Owners and Landlord are subject to respective Regulatory Agreements with HUD).
(u)      This Agreement creates a valid security interest in favor of Lender in the Collateral and, when properly perfected by filing in the appropriate jurisdictions, or by


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possession or control of such Collateral by Lender or delivery of such Collateral to Lender, shall constitute a valid, perfected, first-priority security interest in such Collateral, to the extent that a valid, perfected, first-priority security interest in such Collateral may be perfected by filing or by possession or control of such Collateral.
(v)      Each Borrower, each Owner and Landlord are in compliance in all material respects with all laws, orders, regulations and ordinances of all federal, foreign, state and local governmental authorities binding upon or affecting the business, operation or assets of any Borrower, any Owner and Landlord. Neither any Borrower nor any Owner: (i) has had a civil monetary penalty assessed against it under the Social Security Act (the “ SSA ” ) Section 1128(a), other than nominal amounts for violations which were not of a material nature, (ii) has been excluded from participation under the Medicare program or under a State health care program as defined in the SSA Section 1128(h) ( “ State Health Care Program ” ), or (iii) has been convicted (as that term is defined in 42 C.F.R. Section 1001.2) of any of the following categories of offenses as described in the SSA Section 1127(a) and (b)(l), (2), (3): (A) criminal offenses relating to the delivery of an item or service under Medicare or any State Health Care Program; (B) criminal offenses under federal or state law relating to patient neglect or abuse in connection with the delivery of a health care item or service; (C) criminal offenses under federal or state law relating to fraud, theft, embezzlement, breach of fiduciary responsibility, or other financial misconduct in connection with the delivery of a health care item or service or with respect to any act or omission in a program operated by or financed in whole or in part by any federal, state or local government agency; (D) federal or state laws relating to the interference with or obstruction of any investigations into any criminal offense described in (A) through (C) above; or (E) criminal offenses under federal or state law relating to the unlawful manufacture, distribution, prescription or dispensing of a controlled substance. Without limiting the generality of the foregoing, neither any Borrower, any Owner nor Landlord is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any Medicare or Medicaid Provider Agreement or other agreement or instrument to which any Borrower, any Owner or Landlord is a party, which default has resulted in, or if not remedied within any applicable grace period could result in, the revocation, termination, cancellation or suspension of the Medicare or Medicaid Certification of any Borrower, any Owner or Landlord.
2.2      Continuation of Representations and Warranties . Each Borrower hereby covenants, warrants and agrees that the representations and warranties made in Section 2.1 hereof shall be and shall remain true and correct in all material respects at the time of the Loan Opening and at all times thereafter so long as any part of the Loan shall remain outstanding. Each request for disbursement of Loan Proceeds shall constitute a reaffirmation that these representations and warranties are true in all material respects as of the date of such request and will be true in all material respects on the date of the disbursement.


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ARTICLE 3

THE LOAN

3.1      Agreement to Lend . On the terms of and subject to the conditions of this Agreement, Lender agrees to make advances on the Loan at such times as Borrowers may from time to time request until, but not including, the Maturity Date, and in such amounts as Borrowers may from time to time request, provided, however, that the aggregate principal balance outstanding on the Loan at any time shall not exceed the Availability. The Loan shall be a revolving loan and may be repaid and, subject to the terms and conditions hereof, borrowed again up to, but not including, the Maturity Date, unless the Loan is otherwise accelerated, terminated or extended as provided in this Agreement. The Loan shall be used by Borrowers as working capital for the operation of the Facilities. The Loan shall be disbursed in accordance with Article 5 of this Agreement, including, without limitation, the borrowing procedures contained in Section 5.2 of this Agreement.
3.2      Interest . Interest on funds advanced hereunder shall --
(i)      From the Loan Opening until the Maturity Date, accrue at the interest rates provided for in the Note;
(ii)      Be computed upon advances of the Loan from and including the date of each advance by Lender to or for the account of Borrowers (whether to an escrow or otherwise), on the basis of a 360-day year and the actual number of days elapsed in any portion of a month in which interest is due; and
(iii)      Be paid by Borrowers to Lender together with principal payments, if any, in the manner set forth in the Note.
3.3      Principal Payments; Maturity Date .
(a)      Prior to the Maturity Date, principal payments, if any, shall be made as provided in the Note.
(b)      In the event the outstanding principal balance of the Loan at any time exceeds the Availability, Borrowers shall make such repayments of the Loan as shall be necessary to eliminate such excess.
(c)      The entire principal balance of the Note and all accrued and unpaid interest thereon shall be due, if not sooner paid, on the Maturity Date.
3.4      Loan Fee . In consideration of Lender’s agreement to make the Loan, on the date of the execution and delivery of this Agreement, Borrowers shall pay to Lender a non-refundable fee in the amount of $11,250.
3.5      Non-Utilization Fee . Borrowers agree to pay to Lender a non-utilization fee in an amount equal to 0.50% per annum calculated on the difference between the Loan Amount and the


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sum of the daily average amount of principal outstanding on the Loan. Such non-utilization fee shall be (i) calculated on the basis of a year consisting of 360 days, (ii) paid for the actual number of days elapsed, and (iii) payable quarterly in arrears on the last day of each March, June, September and December, commencing on September 30, 2014, on the Maturity Date of the Loan, and on the date of the occurrence of any Event of Default under this Agreement. The amount of such fee payable on September 30, 2014, shall be calculated for the period commencing on the date of this Agreement and ending on September 30, 2014.
3.6      Uniform Commercial Code Matters .
(a)      All references in this Agreement and the other Loan Documents to the Code are to the Code as from time to time in effect.
(b)      Each Borrower represents and warrants to Lender as follows:
(i)      The exact legal name of such Borrower is as stated in the first paragraph of this Agreement.
(ii)      The nature of each Borrower entity and the State in which it is organized is as stated in the first paragraph of this Agreement.
(iii)      The address of each Borrower’s chief executive office is 1145 Hembree Road, Roswell, Georgia 30076.
(iv)      Each Borrower has no place of business other than the chief executive office referred to in (iii) above, at the address for notices set forth in Section 12.10 of this Agreement and at its Facility in the State.
(c)      Each Borrower shall not, without not less than 30 days’ prior written notice to Lender, change its legal name, the nature of the Borrower entity, the State in which it is organized, its organizational number in the State in which it is organized, if any, the address of its chief executive office, or the addresses of its other places of business, from those referred to in paragraph (b) of this Section.
(d)      Except as otherwise disclosed to Lender in writing, the location of each Borrower’s books and records and all Collateral is at its Facility, and each Borrower shall promptly notify Lender of any change in such location. Each Borrower shall not remove or permit the Collateral to be removed from such location without the prior written consent of Lender, except for Inventory sold in the usual and ordinary course of such Borrower’s business; provided, however, that the foregoing provisions of this sentence shall not be deemed to have been violated by Borrowers in the event of an exercise of remedies against the FHA Mortgagee’s Priority Collateral by FHA Mortgagee.
(e)      Each Borrower acknowledges that by entering into the security agreements contained in this Agreement and the other Loan Documents, such Borrower has authorized the filing of financing statements and amendments under the Code covering the collateral described in such security agreements, without the signature of such Borrower.


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(f)      As additional security for the payment and performance of all of the obligations of Borrowers under this Agreement and the other Loan Documents, each Borrower hereby grants to Lender a security interest in all Deposit Accounts (as defined in the Code) from time to time maintained by such Borrower with Lender, other than the Lessee Rent Account, all cash and investments from time to time on deposit in all such Deposit Accounts, and all proceeds of all of the foregoing.
3.7      HUD Related Provisions . Notwithstanding any other provisions of this Agreement, the following provisions shall apply so long as the HUD Financing is outstanding and the Intercreditor Agreement is in effect:
(a)      Lender shall have a first priority security interest in the AR Lender Priority Collateral, and FHA Mortgagee shall have a second priority security interest in the AR Lender Priority Collateral subject to the terms and conditions of the Intercreditor Agreement.
(b)      FHA Mortgagee shall have a first priority security interest in the FHA Mortgagee’s Priority Collateral, and Lender shall have a second priority security interest in the FHA Mortgagee’s Priority Collateral subject to the terms and conditions of the Intercreditor Agreement.
(c)      Lender shall have no security interest in any Project, any fixtures, any Lessee Rent Account, or any Borrower’s interest under its Lease.
(d)      Each Borrower shall establish and maintain a deposit account with Lender (the “ Governmental AR Account ” ), which shall be used solely and only for the receipt of payments on such Borrower’s governmental accounts receivable. Amounts on deposit in the Governmental AR Account shall be swept on a daily basis into the General Account referred to in paragraph (e) below. It is the responsibility of each Borrower to establish and maintain its Governmental AR Account.
(e)      Each Borrower shall also establish and maintain a deposit account with Lender (the “ General Account ” ), in which Lender shall have a first priority security interest and in which FHA Mortgagee may have a second priority security interest, perfected by a second lien control agreement in favor of FHA Mortgagee. Each Borrower shall use the General Account for the deposit of all payments on such Borrower’s accounts receivable other than governmental accounts receivable. It is the responsibility of each Borrower to establish and maintain its General Account.
(f)      Each Borrower shall also establish and maintain a Lessee Rent Account. Lender shall not have any security interest in or right of setoff against any Lessee Rent Account. It is the responsibility of each Borrower to establish and maintain its Lessee Rent Account.
(g)      Each Borrower may, but is not required to, establish and maintain a deposit account with Lender to be used by such Borrower for paying its payroll (the “ Payroll Account ” ), in which Lender shall have a first priority security interest and in which FHA


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Mortgagee may have a second priority security interest, perfected by a second lien control agreement in favor of FHA Mortgagee. If a Borrower elects to establish the Payroll Account, deposits shall be made by such Borrower in the Payroll Account from the General Account. It is the responsibility of such Borrower to establish and maintain its Payroll Account if it elects to do so.
(h)      At the written direction of Borrowers, any disbursement on the Loan to which Borrowers are entitled under the terms, conditions and provisions of this Agreement shall be deposited by Lender in one or more Lessee Rent Accounts in the amounts directed by Borrowers in such written direction.
(i)      All other disbursements on the Loan to which Borrowers are entitled under the terms, conditions and provisions of this Agreement shall be deposited by Lender solely into one or more of the General Accounts as directed by Borrowers in writing.

ARTICLE 4

LOAN DOCUMENTS

4.1      Loan Documents . As a condition precedent to the Loan Opening, Borrowers agree that they will deliver the following Loan Documents to Lender at or prior to the Loan Opening, all of which must be satisfactory to Lender and Lender’s counsel in form, substance and execution:
(a)      Promissory Note . A Promissory Note (the “ Note ” ) dated the date hereof, executed by Borrowers jointly and severally and made payable to the order of Lender, in the Loan Amount.
(b)      Financing Statements . Uniform Commercial Code Financing Statements as required by Lender to perfect all security interests granted by this Agreement and the other Loan Documents.
(c)      Guaranty . A Guaranty of Payment and Performance dated as of even date herewith (the “ Guaranty ” ), executed by Guarantor to and for the benefit of Lender, guaranteeing to Lender the payment and performance of all obligations of Borrowers in connection with the Loan.
(d)      Borrowing Base Certificate . A Borrowing Base Certificate in the form prepared by Lender, certified as accurate by Borrowers and acceptable to Lender.
(e)      Other Loan Documents . Such other documents and instruments as further security for the Loan as Lender may reasonably require.


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ARTICLE 5

LOAN DISBURSEMENTS

5.1      Conditions to Loan Opening . As conditions precedent to the Loan Opening, Borrowers (i) shall satisfy all applicable conditions and requirements contained in other Sections of this Agreement, and (ii) shall furnish the following to Lender at or prior to the Loan Opening, all of which must be satisfactory to Lender and Lender’s counsel in form, content and execution:
(a)      Insurance Policies . Evidence satisfactory to Lender that the insurance coverages required by Section 7.2 hereof are in force.
(b)      Utilities; Licenses; Permits . Evidence satisfactory to Lender that --
(i)      All utility and municipal services required for the occupancy and operation of each Facility are available and currently servicing such Facility;
(ii)      All permits, licenses and governmental approvals required by applicable law to occupy and operate each Project and each Facility have been issued, are in full force and all fees therefor have been fully paid;
(iii)      The storm and sanitary sewage disposal system, the water system and all mechanical systems serving each Facility comply with all applicable laws, ordinances, rules and regulations, including Environmental Laws and the applicable environmental protection agency, pollution control board and/or other governmental agencies having jurisdiction of each Facility have issued their permits for the operation thereof; and
(iv)      All utility, parking, access (including curb-cuts and highway access), recreational and other easements and permits required or, in Lender’s judgment, necessary for the use of each Facility have been granted or issued.
(c)      Searches . A report from the appropriate filing officers of the states and counties in which the Facilities are located, indicating that no judgments, tax or other liens, security interests, leases of personalty, financing statements or other encumbrances are of record or on file encumbering any collateral for the Loan, other than the security interests under or contemplated by this Agreement and the other Loan Documents, and that there are no judgments, tax liens, pending litigation or bankruptcy actions outstanding with respect to Borrowers and Guarantors.
(d)      Attorney’s Opinion . One or more opinions of counsel to Borrowers and Guarantor addressing such issues as Lender may request, subject to assumptions and qualifications satisfactory to Lender.
(e)      Organizational Documents . Organizational documents, any resolutions required by such documents, and good standing certificates, for Borrowers and the other


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parties to the Loan Documents, and for any entities executing Loan Documents on behalf of Borrowers or any other parties to the Loan Documents.
(f)      Leases and Master Leases . Copies of the Leases and the Master Lease.
(g)      Management Agreement . If any Borrower has entered into a management agreement with respect to its Facility, a copy of such management agreement and a subordination agreement from the manager in a form satisfactory to Lender.
(h)      Broker . Evidence satisfactory to Lender that all brokers’ commissions or fees due with respect to the Loan or the Facility have been paid in full in cash.
(i)      Additional Documents . Such other papers and documents regarding any Borrower, any Project or any Facility as Lender may require.
5.2      Additional Conditions to Loan Opening and Subsequent Disbursements . The following are additional conditions precedent to the Loan Opening and to each subsequent disbursement of Loan Proceeds:
(a)      Borrowing Procedures . Each disbursement of Loan Proceeds may be made available to Borrowers upon any written, electronic or telecopy loan request which Lender in good faith believes to emanate from a properly authorized representative of Borrowers, whether or not that is in fact the case. Each such request shall be effective upon receipt by Lender, shall be irrevocable, and shall specify the date and amount of the borrowing. A request for a disbursement must be received by Lender no later than 11:00 a.m. Chicago, Illinois time, on the day it is to be funded. The proceeds of each disbursement shall be made available at the office of Lender by credit to the account of Borrowers or by other means requested by Borrowers and acceptable to Lender. Borrowers do hereby irrevocably confirm, ratify and approve all such advances by Lender and does hereby indemnify Lender against losses and expenses (including court costs, and reasonable fees of attorneys and paralegals) and shall hold Lender harmless with respect thereto.
(b)      Representations and Warranties . All representations and warranties of Borrowers contained in this Agreement, the other Loan Documents and other documents delivered to Lender shall be true and correct in all material respects.
(c)      Financial Condition . There shall be no material adverse change in the financial condition of any Borrower or Guarantor.
(d)      Accounts Set Up with Lender . Without limitation on the generality of paragraph (f) below, Borrowers shall have set up their respective operating and other accounts with Lender as required by Section 7.8 of this Agreement.
(e)      Field Audit . In the case of the Loan Opening, Lender shall have completed a field audit as described in Section 7.17 of this Agreement and the results of such field audit shall be acceptable to Lender.


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(f)      No Default or Event of Default . No Default or Event of Default under this Agreement, any other Loan Document, any Lease or any Master Lease shall have occurred and be continuing.
5.3      Termination of Agreement . Borrowers agree that all conditions precedent to the Loan Opening will be complied with on or prior to date of this Agreement. If all of the conditions precedent to the Loan Opening hereunder shall not have been performed on or before date of this Agreement, Lender, at its option at any time thereafter and prior to the Loan Opening, may terminate this Agreement and all of its obligations hereunder by giving a written notice of termination to Borrowers. In the event of such termination, Borrowers shall pay all Loan Expenses which have accrued or been charged as of the date of such termination.

ARTICLE 6

PAYMENT OF LOAN EXPENSES
6.1      Payment of Loan Expenses at Loan Opening . At the Loan Opening, Lender may pay from Loan Proceeds all Loan Expenses, to the extent the same have not been previously paid.

ARTICLE 7

FURTHER AGREEMENTS OF BORROWER

7.1      Fixtures and Personal Property; Concerning the Leases .
(a)      Except for a security interest granted to Lender, each Borrower agrees that all of the personal property, fixtures, attachments, furnishings and equipment owned by it will be kept free and clear of all chattel mortgages, vendor’s liens, and all other liens, claims, encumbrances and security interests whatsoever except Permitted FHA Liens, and that such Borrower will be the absolute owner of said personal property, fixtures, attachments and equipment. Borrowers, on request, shall furnish Lender with satisfactory evidence of such ownership, and of the terms of purchase and payment therefor.
(b)      Each Borrower shall at all times maintain, preserve and keep its plant, properties and equipment, including its Facility and all Collateral, in good repair, working order and condition, normal wear and tear excepted, and shall from time to time make all needful and proper repairs, renewals, replacements, and additions thereto so that at all times the efficiency thereof shall be fully preserved and maintained. Each Borrower shall permit Lender to examine and inspect such plant, properties and equipment, including its Facility and all Collateral, at all reasonable times and in such manner so as not to cause unreasonable interference with the operations in its Facility. While the HUD Financing is in effect, any expenses of Lender associated with such examinations and inspections will not be secured by the Collateral, and no such examinations or inspections shall be invasive or interfere with FHA Mortgagee’s rights.


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(c)      Each Borrower shall comply with its Lease. Each Borrower shall at all times duly perform and observe all of the terms, provisions, conditions and agreements on its part to be performed and observed under its Lease, and shall not suffer or permit any Default or Event or Default on the part of such Borrower to exist thereunder. Without the prior written consent of Lender, which may be given or withheld in its sole and absolute discretion, each Borrower shall not agree or consent to, or suffer or permit, any modification, amendment or termination of its Lease. Each Borrower shall promptly furnish to Lender copies of all notices of default and other material documents and communications sent or received by such Borrower under or relating to its Lease.
7.2      Insurance Policies .
(a)      Each Borrower shall at all times maintain with insurance companies acceptable to Lender in its reasonable judgment, such insurance coverage as may be required by any law or governmental regulation or court decree or order applicable to it and such other insurance, to such extent and against such hazards and liabilities, including employers’, public and professional liability risks, as is customarily maintained by companies similarly situated, and shall have insured amounts no less than, and deductibles no higher than, are acceptable to Lender in its reasonable judgment. Each Borrower shall furnish to Lender a certificate setting forth in reasonable detail the nature and extent of all insurance maintained by such Borrower, which shall be acceptable in all respects to Lender in its reasonable judgment. Each Borrower shall cause each issuer of an insurance policy to provide Lender with an endorsement (i) showing Lender as lender’s loss payee with respect to each policy of property or casualty insurance covering tangible property, other than the FHA Mortgagee’s Priority Collateral while the HUD Financing is outstanding; and (ii) providing that 30 days’ notice will be given to Lender prior to any cancellation of, material reduction or change in coverage provided by or other material modification to such policy. Each Borrower shall execute and deliver to Lender a collateral assignment, in form and substance satisfactory to Lender, of each business interruption insurance policy maintained by such Borrower.
(b)      In the event any Borrower either fails to provide Lender with evidence of the insurance coverage required by this Section or at any time hereafter shall fail to obtain or maintain any of the policies of insurance required above, or to pay any premium in whole or in part relating thereto, then Lender, without waiving or releasing any obligation or default by Borrowers hereunder, may at any time (but shall be under no obligation to so act), obtain and maintain such policies of insurance and pay such premiums and take any other action with respect thereto, which Lender deems advisable. This insurance coverage (i) may, but need not, protect such Borrower’s interests in such property, including the Collateral, and (ii) may not pay any claim made by, or against, such Borrower in connection with such property, including the Collateral. Such Borrower may later cancel any such insurance purchased by Lender, but only after providing Lender with evidence that such Borrower has obtained the insurance coverage required by this Section. If Lender purchases insurance, Borrowers will be responsible for the costs of that insurance, including interest and any other charges that may be imposed with the placement of the insurance, until the effective date of the cancellation or expiration of the insurance. The costs of the insurance may be added to the principal amount of the Loan owing hereunder. The costs of the insurance may be more than the cost of the insurance Borrowers may be able to obtain on their own.


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7.3      Furnishing Information .
(a)      Each Borrower shall promptly supply Lender with such information concerning its assets, liabilities and affairs, and the assets, liabilities and affairs of Guarantors, as Lender may reasonably request from time to time hereafter; which shall include:
(i)      Without the necessity of any request by Lender, as soon as available and in no event later than 45 days after the end of each fiscal quarter commencing with the fiscal quarter ending September 30, 2014, financial statements of Borrowers showing the results of operations of the Facilities and consisting of a balance sheet, statement of income and expense and statement of payor mix, prepared in accordance with GAAP, and certified by an officer of the applicable Borrower.
(ii)      Without the necessity of any request by Lender, as soon as available and in no event later than 120 days after the end of each fiscal year commencing with the fiscal year ending December 31, 2014, an annual financial statement of each Borrower showing the results of operations of its Facility and consisting of a balance sheet, statement of income and expense, statement of cash flows and statement of payor mix, prepared in accordance with GAAP, and certified by an officer of such Borrower, and accompanied by a review report of a firm of independent certified public accountants acceptable to Lender.
(iii)      Without the necessity of any request by Lender, as soon as available and in no event later than 120 days after the end of each fiscal year commencing with the fiscal year ending December 31, 2014, annual consolidated financial statements of AdCare consisting of a balance sheet, statement of income and expense and a statement of cash flows, prepared in accordance with GAAP, and certified by an officer of AdCare, and accompanied by an audit report of a firm of independent certified public accountants.
(iv)      Without the necessity of any request by Lender, with the annual consolidated financial statements of AdCare required to be furnished hereunder, copies of the schedules and other financial information for Borrowers which were used in the preparation of such financial statements of AdCare, and a letter from the firm of independent certified public accountants which audited such consolidated financial statements of AdCare stating that such schedules and other financial information for Borrowers were used in the preparation of such consolidated financial statements of AdCare.
(v)      Without the necessity of any request by Lender, with each quarterly financial statement of Borrowers required to be furnished hereunder, a duly completed compliance certificate, dated the date of such financial statements and certified as true and correct by appropriate officers of Borrowers and AdCare, containing a computation of each of the financial covenants set forth in Sections 7.12, 7.13, 7.14 and 7.15 hereof, and stating that Borrowers have not become aware of any Default or Event of Default under this Agreement or any of the other Loan Documents that has occurred and is continuing or, if there is any such Default or Event of Default describing it and the steps, if any, being taken to cure it.


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(vi)      Without the necessity of any request by Lender, within 30 days after the end of each month commencing with the month of September, 2014, a Borrowing Base Certificate dated as of the last business day of such month, certified as true and correct by an authorized representative of Borrowers and in a form acceptable to Lender in its sole and absolute discretion, provided, however, that at any time an Event of Default exists under this Agreement, Lender may require Borrowers to deliver Borrowing Base Certificates more frequently.
(vii)      Within 30 days after the end of each month, an aged schedule of the Accounts of each Borrower, listing the name and amount due from each Account Debtor and showing the aggregate amounts due each Borrower from (A) 0-30 days, (B) 31-60 days, (C) 61-90 days, (D) 91 - 120 days, and (E) more than 120 days, and certified as accurate by each Borrower’s treasurer or chief financial officer.
(b)      Borrowers shall promptly notify Lender of any condition or event which constitutes a Default or Event of Default under this Agreement or any of the other Loan Documents, and of any material adverse change in the financial condition of any Borrower or Guarantor.
(c)      It is a condition of this Agreement and the Loan that each Borrower shall each maintain a standard and modern system of accounting in accordance with GAAP consistently applied.
(d)      It is a condition of this Agreement and the Loan that Borrowers shall each permit Lender or any of its agents or representatives to have access to and to examine all books and records regarding the Facilities at any time or times hereafter during business hours. While the HUD Financing is in effect, any expenses of Lender associated with such examinations will not be secured by the Collateral, and no such examinations shall be invasive or interfere with FHA Mortgagee’s rights.
(e)      It is a condition of this Agreement and the Loan that Borrowers shall each permit Lender to copy and make abstracts from any and all of said books and records.
7.4      Excess Indebtedness . Borrowers agree to pay to Lender on demand the amount by which the indebtedness hereunder, at any time, may exceed the Availability.
7.5      Compliance with Laws; Environmental Matters .
(a)      Borrowers shall comply, in all respects, including the conduct of their business and operations and the use of their properties and assets, with all applicable laws, rules, regulations, decrees, orders, judgments, licenses and permits, including without limitation, Environmental Laws, Titles XVIII and XIX of the Social Security Act, Medicare Regulations, Medicaid Regulations, and all laws, rules and regulations of any governmental authorities pertaining to the licensing of professional and other health care providers.
(b)      With the exception of Permitted Substances, the Facilities shall not be used, for any activities which, directly or indirectly, involve the use, generation, treatment, storage, transportation


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or disposal of any Hazardous Substances, and no Hazardous Substances shall exist on the Facilities or under the Facilities or in any surface waters or groundwaters on or under the Facilities. The Facilities and their existing and future uses shall comply with all Environmental Laws, and Borrowers shall not violate any Environmental Laws.
7.6      ERISA Liabilities; Employee Plans . Borrowers shall (i) keep in full force and effect any and all Employee Plans which are presently in existence or may, from time to time, come into existence under ERISA, and not withdraw from any such Employee Plans, unless such withdrawal can be effected or such Employee Plans can be terminated without liability to any Borrower; (ii) make contributions to all of such Employee Plans in a timely manner and in a sufficient amount to comply with the standards of ERISA, including the minimum funding standards of ERISA; (iii) comply with all material requirements of ERISA which relate to such Employee Plans; (iv) notify Lender immediately upon receipt by any Borrower of any notice concerning the imposition of any withdrawal liability or of the institution of any proceeding or other action which may result in the termination of any such Employee Plans or the appointment of a trustee to administer such Employee Plans; (v) promptly advise Lender of the occurrence of any “Reportable Event” or “Prohibited Transaction” (as such terms are defined in ERISA), with respect to any such Employee Plans; and (vi) amend any Employee Plan that is intended to be qualified within the meaning of Section 401 of the Internal Revenue Code of 1986 to the extent necessary to keep the Employee Plan qualified, and to cause the Employee Plan to be administered and operated in a manner that does not cause the Employee Plan to lose its qualified status.
7.7      Licensure; Notices of Agency Actions .
(a)      Each Borrower shall be fully qualified by all necessary permits, licenses, certifications, accreditations and qualifications and shall be in compliance with all annual filing requirements of all regulatory authorities.
(b)      Borrowers shall within five days after receipt, furnish to Lender copies of all adverse notices from any licensing, certifying, regulatory, reimbursing or other agency which has jurisdiction over any Facility or over any license, permit or approval under which any Facility operates, and if any Borrower becomes aware that any such notice is to be forthcoming before receipt thereof, it shall promptly inform Lender thereof.
7.8      Facility Accounts and Revenues . It is a condition of this Agreement and the Loan that unless Lender exercises its right to terminate a DAISA or any deposit account control agreement entered into by Lender with FHA Mortgagee, Borrowers shall set up and maintain all of their respective operating accounts and other accounts related to the Facilities with Lender, shall deposit all of their respective income and receipts promptly upon receipt in such accounts, and shall maintain all of their respective cash and investments on deposit in deposit accounts with Lender.
7.9      Single-Asset Entity; Indebtedness; Distributions .
(a)      Each Borrower shall not at any time own any asset or property other than its interest under its Lease, property located in and used in the operation of its Facility and property related thereto, and shall not at any time engage in any business other than the operation of its Facility.


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The articles of organization and operating agreement of each Borrower shall not be modified or amended, nor shall any member of any Borrower be released or discharged from its, his or her obligations under the operating agreement of such Borrower.
(b)      Each Borrower shall not at any time have outstanding any indebtedness or obligations, secured or unsecured, direct or indirect, absolute or contingent, including any guaranty, other than the following: (i) obligations to Lender; (ii) obligations under interest rate protection agreements to which Lender is a party; (iii) obligations, other than borrowings, incurred in the ordinary course of the operation of its Facility; and (iv) obligations under its Lease; (v) obligations under a Security Agreement creating Permitted FHA Liens and obligations under a Regulatory Agreement - Nursing Homes executed in connection with the HUD Financing.
(c)      If any Default or Event of Default shall occur and be continuing under this Agreement or any of the other Loan Documents, each Borrower shall not, directly or indirectly, make any Distribution. In addition, each Borrower shall not, directly or indirectly, at any time make any Distribution that would cause such Borrower’s cash and cash equivalents remaining after such Distribution to be less than an amount equal to a reasonable working capital reserve.
7.10      Restrictions on Transfer .
(a)      Each Borrower shall not effect, suffer or permit any Prohibited Transfer. Any conveyance, sale, assignment, transfer, lien, pledge, mortgage, security interest or other encumbrance or alienation (or any agreement to do any of the foregoing) of any of the following properties or interests shall constitute a “ Prohibited Transfer ” :
(i)      Tangible assets, excepting only sales or other dispositions of property no longer useful in connection with the operation of a Facility, provided that prior to the sale or other disposition thereof, such property has been replaced by property of at least equal value and utility;
(ii)      Any shares of capital stock of a corporate Borrower, or a corporation which is a direct or indirect owner of an ownership interest in any Borrower (other than the shares of capital stock of a corporate trustee or a corporation whose stock is publicly traded on a national securities exchange or on the National Association of Securities Dealers’ Automated Quotation System);
(iii)      All or any part of the membership interests in a limited liability company Borrower, or a limited liability company which is a direct or indirect owner of an ownership interest in any Borrower;
(iv)      All or any part of the general partner or the limited partner interest, as the case may be, of a partnership or limited partnership Borrower, or a partnership or limited partnership which is a direct or indirect owner of an ownership interest in any Borrower;
(v)      If there shall be any change in Control (by way of transfers of stock, partnership or member interests or otherwise) in any partner, member, manager or shareholder, as applicable, which directly or indirectly Controls the day to day operations


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and management of any Borrower or Guarantor that is not a natural person and/or owns a Controlling interest in any Borrower or any such Guarantor; provided, however, that this subparagraph shall not apply to AdCare; or
(vi)      If any Guarantor who is a natural person shall die or be declared a legal incompetent;
in each case whether any such conveyance, sale, assignment, transfer, lien, pledge, mortgage, security interest, encumbrance or alienation is effected directly, indirectly (including the nominee agreement), voluntarily or involuntarily, by operation of law or otherwise; provided, however, that the foregoing provisions of this Section shall not apply to (i) liens securing obligations to Lender, or (ii) any transfers of any shares of stock or partnership or limited liability company interests, as the case may be, by or on behalf of an owner thereof who is deceased or declared judicially incompetent, to such owner’s heirs, legatees, devisees, executors, administrators, estate or personal representatives. Any Borrower’s entering into or having in effect a Security Agreement creating Permitted FHA Liens, and entering into or having in effect a Regulatory Agreement - Nursing Homes in connection with the HUD Financing, shall not constitute a violation of this paragraph.
(b)      In determining whether or not to make the Loan, Lender evaluated the background and experience of each Borrower and its members in operating property such as the Facilities, found it acceptable and relied and continues to rely upon same as the means of maintaining the value of the Facilities. Each Borrower and its members are well experienced in borrowing money and owning and operating property such as the Facilities, were ably represented by a licensed attorney at law in the negotiation and documentation of the Loan and bargained at arm’s length and without duress of any kind for all of the terms and conditions of the Loan, including this provision. Each Borrower recognizes that Lender is entitled to keep its loan portfolio at current interest rates by either making new loans at such rates or collecting assumption fees and/or increasing the interest rate on a loan, the security for which is purchased by a party other than the original Borrowers. In accordance with the foregoing, each Borrower agrees that if this Section is deemed a restraint on alienation, that it is a reasonable one.
7.11      Leasing, Operation and Management of Projects .
(a)      Each Project shall at all times be owned by Owner 1 or Owner 2, as applicable, leased by the respective Owner to Landlord under the Master Lease, and subleased by Landlord to the respective Borrower under the respective Lease (with the result that no Borrower shall own a Project). Each Borrower shall not agree or consent to or suffer or permit any modification, amendment or termination of its Lease, and shall not suffer or permit any Event of Default on the part of such Borrower to exist at any time under its Lease.
(b)      Each Facility shall at all times be operated as a skilled nursing facility under the management of the applicable Borrower.
7.12      Minimum Coverage of Rent and Debt Service . It is a condition of this Agreement and the Loan that for each fiscal quarter commencing with the fiscal quarter ending September 30, 2014, the ratio of --


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(i)      the amount of the combined EBITDAR for Borrowers for such quarter, to
(ii)      the sum of the combined amount of the following for Borrowers for such quarter: (A) Rental Expense, plus (B) Debt Service,
shall be not less than 1.50 to 1.00. Notwithstanding the definition of the term Net Income in Section 1.1 of this Agreement, the Net Income for each Borrower used in calculating EBITDAR of such Borrower for the purpose of this Section for any period, shall be computed by taking into account management fees equal to the greater of such Borrower’s actual management fees for such period or imputed management fees equal to 5% of such Borrower’s gross income for such period as determined in accordance with GAAP.
7.13      Minimum Fixed Charge Coverage Ratio of Borrowers . It is a condition of this Agreement and the Loan that as of the end of each fiscal quarter commencing with the fiscal quarter ending September 30, 2014, that the ratio of --
(i)      the amount of the combined EBITDAR for Borrowers for the 12-month period ending on the last day of such quarter, to
(ii)      the sum of the combined amounts of the following for Borrowers for the 12‑month period ending on the last day of such quarter: (A) Rental Expense, plus (B) Debt Service, plus (C) Distributions, other than any amounts which were treated as an expense for accounting purposes,
shall be not less than 1.05 to 1.00. For the avoidance of doubt, (i) unlike Section 7.12 hereof, the Net Income for Borrowers used in calculating EBITDAR of Borrowers for the purpose of this Section for any period shall be computed by taking into account each Borrower’s actual management fees for such period only and not taking into account any imputed management fees. Notwithstanding the foregoing provisions of this Section, in the case of the fiscal quarters ending September 30, 2014, December 31, 2014, and March 30, 2015, the calculation of such ratio shall be made for the period commencing on July 1, 2014 and ending on the last day of such quarter, instead of for the full 12-month period ending on the last day of such quarter.
7.14      AdCare Leverage Ratio . It is a condition of this Agreement and the Loan that for each fiscal year commencing with the fiscal year ending December 31, 2014, the ratio of --
(i)      the total amount of long term senior secured indebtedness of AdCare, including the current portion thereof, each as determined in accordance with GAAP, outstanding on the last day of such year, to
(ii)      the amount of EBITDA for AdCare for such year,
shall be not more than 11.00 to 1.00.
7.15      AdCare Debt Service Coverage Ratio . It is a condition of this Agreement and the Loan that for each fiscal year commencing with the fiscal year ending December 31, 2014, the ratio of --


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(i)      the amount of EBITDAR for AdCare for such year, to
(ii)      the total amount of Debt Service required to be paid by AdCare for such year,
shall be not less than 1.00 to 1.00. Notwithstanding the foregoing provisions of this Section, if such ratio for any fiscal year is less than 1.00 to 1.00, the condition provided for in this Section shall nevertheless be deemed to be satisfied if the amount of unencumbered, unrestricted cash shown as an asset in AdCare’s audited financial statements at the end of such fiscal year is not less than an amount equal to the sum of (i) $2,000,000, plus (ii) the total additional amount of EBITDAR for AdCare that would have been necessary in order for such ratio to have been not less than 1.00 to 1.00 for such fiscal year and for all prior fiscal years ending after on and after December 31, 2014 (the “ Cumulative Shortfall ” ); provided, however, that the foregoing provisions of this sentence shall not apply if the Cumulative Shortfall is more than $3,000,000.
7.16      Security Interest Matters . This Agreement is intended to be a security agreement under the Code for the purpose of creating the security interests provided for herein. Borrowers shall execute and deliver such additional security agreements and other documents as Lender shall from time to time request in order to create and perfect such security interests. Borrowers shall keep all of the Collateral free and clear of all other liens, security interests and encumbrances except Permitted FHA Liens.
7.17      Field Audits . Borrowers shall permit Lender to inspect the Inventory, other tangible assets and/or other business operations of such Borrower, to perform appraisals of the Equipment of such Borrower, and to inspect, audit, check and make copies of, and extracts from, the books, records, computer data, computer programs, journals, orders, receipts, correspondence and other data relating to Inventory, Accounts and any other Collateral, the results of which must be satisfactory to Lender in Lender’s sole and absolute discretion. All such inspections or audits by Lender shall be at Borrowers’ sole expense, other than inspections of the FHA Mortgagee’s Priority Collateral while the HUD Financing is in effect; provided, however, that in the case of any inspections or audits which are to be at Borrowers’ sole expense and which are performed at a time when there is no Default or Event of Default under this Agreement or any of the other Loan Documents, the expense to Borrowers for any such inspection or audit shall not exceed $15,000.
7.18      Collateral Records . Each Borrower shall keep full and accurate books and records relating to the Collateral and shall mark such books and records to indicate Lender’s security interest in the Collateral, including placing a legend, in form and content acceptable to Lender, on all Chattel Paper created by such Borrower indicating that Lender has a security interest in such Chattel Paper.
7.19      Further Assurance . Each Borrower, on request of Lender, from time to time, shall execute and deliver such documents as may be necessary to perfect and maintain perfected as valid liens upon the Collateral the liens granted to Lender pursuant to this Agreement or any of the other Loan Documents, and to fully consummate the transactions contemplated by this Agreement.


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ARTICLE 8

SECURITY

8.1      Security for the Loan . As security for the payment of all of the principal of and interest on the Loan and the Note and all other amounts coming due under this Agreement or any of the other Loan Documents, and the performance by Borrowers of all obligations under this Agreement and the other Loan Documents, each Borrower does hereby pledge, assign, transfer, deliver and grant to Lender a continuing and unconditional security interest in and to the following property of such Borrower (all of which property, along with the products and proceeds therefrom, are individually and collectively referred to as the “ Collateral ” ): all personal property and other assets (other than its Facility, fixtures and such Borrower’s interest under its Lease), whether now owned by or owing to, or hereafter acquired by or arising in favor of, such Borrower (including under any trade names, styles or derivations thereof), and whether owned or consigned by or to, or leased from or to, such Borrower, and regardless of where located including the following:
(a)      All Accounts;
(b)      All Books;
(c)      All Chattel Paper;
(d)      All Documents;
(e)      All General Intangibles (including payment intangibles and Software);
(f)      All Goods (including Inventory, Equipment and Fixtures);
(g)      All Instruments;
(h)      All Investment Property;
(i)      All Deposit Accounts of such Borrower, including the Deposit Account into which its governmental receivables are deposited (subject to any DAISA) and the Deposit Account into which the non-governmental receivables are deposited, and all other bank accounts and all deposits therein, but excluding its Lessee Rent Account;
(j)      All money, cash or cash equivalents of such Borrower;
(k)      All Supporting Obligations and Letter-of-Credit Rights of such Borrower;
(l)      Any and all commercial tort claims; and
(m)      To the extent not otherwise included, all Proceeds, tort claims, insurance claims and other rights to payments not otherwise included in the foregoing and products


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of the foregoing and all accessions to, substitutions and replacements for, and rents and profits of, each of the foregoing.
In addition, Lender shall have a right of setoff against the property of such Borrower held by Lender consisting of property described above now or hereafter in the possession or custody of or in transit to Lender, for any purpose, including safekeeping, collection or pledge, for the account of such Borrower, or as to which such Borrower may have any right or power, provided however, that Lender hereby waives any right of set off or recoupment with respect to the Loan against any Lessee Rent Account.
8.2      Possession and Transfer of Collateral . Unless an Event of Default exists hereunder, Borrowers shall be entitled to possession or use of the Collateral (other than Instruments or Documents, Tangible Chattel Paper, Investment Property consisting of certificated securities and other Collateral required to be delivered to Lender pursuant to this Article 8). The cancellation or surrender of the Note, upon payment or otherwise, shall not affect the right of Lender to retain the Collateral for any other obligations secured by the Collateral. Borrowers shall not sell, assign (by operation of law or otherwise), license, lease or otherwise dispose of, or grant any option with respect to any of the Collateral, except that Borrowers may sell Inventory in the ordinary course of business and may create Permitted FHA Liens.
8.3      Preservation of the Collateral . Lender may, but is not required, to take such actions from time to time as Lender deems appropriate to maintain or protect the Collateral. Lender shall have exercised reasonable care in the custody and preservation of the Collateral if Lender takes such action as Borrowers shall reasonably request in writing which is not inconsistent with Lender’s status as a secured party, but the failure of Lender to comply with any such request shall not be deemed a failure to exercise reasonable care; provided, however, Lender’s responsibility for the safekeeping of the Collateral shall (i) be deemed reasonable if such Collateral is accorded treatment substantially equal to that which Lender accords its own property, and (ii) not extend to matters beyond the control of Lender, including acts of God, war, insurrection, riot or governmental actions. In addition, any failure of Lender to preserve or protect any rights with respect to the Collateral against prior or third parties, or to do any act with respect to preservation of the Collateral, not so requested by Borrowers, shall not be deemed a failure to exercise reasonable care in the custody or preservation of the Collateral. Borrowers shall have the sole responsibility for taking such action as may be necessary, from time to time, to preserve all rights of Borrowers and Lender in the Collateral against prior or third parties. Without limiting the generality of the foregoing, where Collateral consists in whole or in part of securities, each Borrower represents to, and covenants with, Lender that such Borrower has made arrangements for keeping informed of changes or potential changes affecting the securities (including rights to convert or subscribe, payment of dividends, reorganization or other exchanges, tender offers and voting rights), and each Borrower agrees that Lender shall have no responsibility or liability for informing such Borrower of any such or other changes or potential changes or for taking any action or omitting to take any action with respect thereto.
8.4      Other Actions as to Any and All Collateral . Each Borrower further agrees to take any other action reasonably requested by Lender to ensure the attachment, perfection and priority as provided herein of, and the ability of Lender to enforce, Lender’s security interest in any and all


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of the Collateral, including (i) causing Lender’s name to be noted as secured party on any certificate of title for a titled good if such notation is a condition to attachment, perfection or priority of, or ability of Lender to enforce, Lender’s security interest in such Collateral, (ii) complying with any provision of any statute, regulation or treaty of the United States as to any Collateral if compliance with such provision is a condition to attachment, perfection or priority of, or ability of Lender to enforce, Lender’s security interest in such Collateral, (iii) obtaining governmental and other third party consents and approvals, including any consent of any licensor, lessor or other person obligated on Collateral, (iv) obtaining waivers from mortgagees and landlords in form and substance satisfactory to Lender, and (v) taking all actions required by the Code in effect from time to time or by other law, as applicable in any relevant Code jurisdiction, or by other law as applicable in any foreign jurisdiction. Each Borrower further agrees to indemnify and hold Lender harmless against claims of any persons not a party to this Agreement concerning disputes arising over the Collateral.
8.5      Collateral in the Possession of a Warehouseman or Bailee . If any of the Collateral at any time is in the possession of a warehouseman or bailee, Borrowers shall promptly notify Lender thereof, and shall promptly obtain an agreement acceptable to Lender under which such person acknowledges the security interest of Lender and waives any liens held by such person on such property.
8.6      Letter-of-Credit Rights . If any Borrower, on its own behalf and not as agent for a client of such Borrower, at any time is a beneficiary under a letter of credit now or hereafter issued in favor of such Borrower, such Borrower shall promptly notify Lender thereof and, at the request and option of Lender, such Borrower shall, pursuant to an agreement in form and substance satisfactory to Lender, either (i) arrange for the issuer and any confirmer of such letter of credit to consent to an assignment to Lender of the proceeds of any drawing under the letter of credit, or (ii) arrange for Lender to become the transferee beneficiary of the letter of credit, with Lender agreeing, in each case, that the proceeds of any drawing under the letter to credit are to be applied as provided in this Agreement.
8.7      Commercial Tort Claims . If any Borrower shall at any time hold or acquire a Commercial Tort Claim, such Borrower shall immediately notify Lender in writing signed by such Borrower of the details thereof and grant to Lender in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, in each case in form and substance satisfactory to Lender, and shall execute any amendments hereto deemed reasonably necessary by Lender to perfect its security interest in such Commercial Tort Claim.
8.8      Electronic Chattel Paper and Transferable Records . If any Borrower at any time holds or acquires an interest in any electronic chattel paper or any “transferable record”, as that term is defined in Section 201 of the federal Electronic Signatures in Global and National Commerce Act, or in Section 16 of the Uniform Electronic Transactions Act as in effect in any relevant jurisdiction, such Borrower shall promptly notify Lender thereof and, at the request of Lender, shall take such action as Lender may reasonably request to vest in Lender control under Section 9-105 of the Code of such electronic chattel paper or control under Section 201 of the federal Electronic Signatures in Global and National Commerce Act or, as the case may be, Section 16 of the Uniform Electronic Transactions Act, as so in effect in such jurisdiction, of such transferable record. Lender agrees with Borrowers that Lender will arrange, pursuant to procedures satisfactory to Lender and


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so long as such procedures will not result in Lender’s loss of control, for Borrowers to make alterations to the electronic chattel paper or transferable record permitted under Section 9-105 of the Code or, as the case may be, Section 201 of the federal Electronic Signatures in Global and National Commerce Act or Section 16 of the Uniform Electronic Transactions Act for a party in control to make without loss of control.
8.9      Directions for Payment of Accounts to Account at Lender; Court Order for Payment of Accounts to Lender .
(a)      In the case of all Account Debtors which are State or federal government or private healthcare payment programs, including, without limitation, Medicare, Medicaid and private insurance companies, each Borrower shall at all times cause such Account Debtors to be directed to pay, and to pay, all Accounts, including, without limitation, all Health-Care-Insurance Receivables, to a deposit account in the name of such Borrower at Lender. The failure of any Borrower to give any such direction, or the withdrawal by any Borrower of any such direction, shall constitute an immediate Event of Default.
(b)      In addition to all other remedies under the this Agreement and under applicable law, upon the occurrence of any Event of Default, Lender shall be entitled to an immediate order of court for the payment of all Accounts, including, without limitation, all Health-Care-Insurance Receivables, directly to Lender by all Account Debtors.

ARTICLE 9

ASSIGNMENTS, SALE AND ENCUMBRANCES

9.1      Lender’s Right to Assign . Lender may assign, negotiate, pledge or otherwise hypothecate this Agreement or any of its rights and security hereunder, including the Note and the other Loan Documents, to any bank, participant, financial institution or any other person or entity, and in case of such assignment, negotiation, pledge or other hypothecation, Borrowers shall accord full recognition thereto and agrees that all rights and remedies of Lender in connection with the interest so assigned, negotiated, pledged or otherwise hypothecated shall be enforceable against Borrowers by such bank, financial institution or other person or entity, with the same force and effect and to the same extent as the same would have been enforceable by Lender but for such assignment, negotiation, pledge or other hypothecation. The following provisions shall apply notwithstanding the foregoing provisions of this Section:
(a)      Lender shall not assign the Loan, in whole or in part, unless either (i) Lender remains responsible for the servicing of the Loan, or (ii) Lender obtains Borrowers’ written approval of the assignee, which approval shall not be unreasonably withheld, delayed or conditioned.
(b)      It is the intention of the parties that Lender will give Borrowers written notice of any assignment of the Loan, in whole or in part, occurring after the date of this Agreement, but the failure of Lender to do so shall not impair the effectiveness of any such assignment or result in any liability on the part of Lender to Borrowers.


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(c)      Lender shall not assign the Loan unless the assignee of the Loan shall enter into the agreements with FHA Mortgagee which are described in Section 3.6 of this Agreement. However, while the HUD Financing is in effect, any such assignment may only be to a HUD approved Accounts Receivable LEAN Lender and the existing deposit control agreements, DAISA, and security agreements entered into in connection with the HUD Financing may not be adversely affected.
(d)      Lender shall not enter into a participation agreement unless the following requirements have been met: (i) Lender must be the lead lender and retain title to the Loan and sole control of the administration and enforcement of the Loan and shall be the sole party entitled to enforce the Intercreditor Agreements; (ii) the participation agreement must be consistent with the foregoing and shall further provide that neither FHA Mortgagee, HUD, any Owner, Landlord nor any Borrower shall have any obligation to recognize or deal with anyone other than Lender with respect to the rights, benefits and obligations of FHA Mortgagee and/or HUD under the Intercreditor Agreements, or under any deposit account control agreement or any other agreement related to the Loan; and (iii) the participants in the Loan must acknowledge that the Loan is subject to the Intercreditor Agreements and that their interests are bound thereby, and (iv) a certification is provided to HUD that none of the participants is an affiliate of any Borrower.
(e)      In addition to the assignments and participations permitted under the foregoing provisions of this Section, Lender may assign and pledge all or any portion of the Loan and the Note to any Federal Reserve Bank as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Bank, and the Loan and the Note shall be fully transferable as provided therein. No such assignment shall release the Lender from its obligations hereunder.
9.2      Prohibition of Assignments and Encumbrances by Borrowers . Except as expressly permitted by this Agreement, Borrowers shall not create, effect, consent to, attempt, contract for, agree to make, suffer or permit any Prohibited Transfer.

ARTICLE 10

EVENTS OF DEFAULT BY BORROWERS

10.1      Event of Default Defined . The occurrence of any one or more of the following shall constitute an Event of Default under this Agreement, and any Event of Default which may occur hereunder shall constitute an Event of Default under each of the other Loan Documents:
(a)      Borrowers fail to pay (i) any installment of principal or interest payable pursuant to the Note on the date when due, or (ii) any other amount payable to Lender under the Note, this Agreement or any of the other Loan Documents when any such payment is due in accordance with the terms hereof or thereof;


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(b)      If there is any failure to perform, observe or satisfy any obligation, covenant, agreement, term, condition or provision contained in any of the following provisions of this Agreement: Section 7.7(a), 7.8, 7.9, 7.10, 7.11, 7.12, 7.13, 7.14, 7.15, 7.16 or 8.9;
(c)      If there is any failure to perform, observe or satisfy any obligation, covenant, agreement, term, condition or provision contained in this Agreement and not otherwise described in this Section and such failure is not cured within 30 days after written notice to Borrowers; provided, however, that --
(i)      If such failure can be cured solely by the payment of money, such failure shall not constitute an Event of Default unless it shall continue for a period of five days after written notice to Borrowers;
(ii)      If such failure cannot be cured solely by the payment of money and does not pose an emergency or dangerous condition or a material threat to the security for the Loan, such failure shall not constitute an Event of Default unless it shall continue for a period of 30 days after written notice to Borrowers; and
(iii)      If a failure described in (ii) above is of such a nature that it cannot reasonably be cured within such 30-day period, and if such failure is susceptible of cure, it shall not constitute an Event of Default if corrective action is instituted by Borrowers within such 30-day period and is diligently pursued and such failure is cured within 90 days after the occurrence of such failure;
(d)      The existence of any inaccuracy or untruth in any material respect in any representation or warranty contained in this Agreement or any of the other Loan Documents or of any statement or certification as to facts delivered to Lender by Borrowers or Guarantor; provided, however, that --
(i)      If such inaccuracy or untruth can be cured solely by the payment of money, such failure shall not constitute an Event of Default unless it shall continue for a period of 10 days after any Borrower becomes aware of inaccuracy or untruth, whether by notice from Lender or otherwise;
(ii)      If such inaccuracy or untruth cannot be cured solely by the payment of money and does not pose an emergency or dangerous condition or a material threat to the security for the Loan, such failure shall not constitute an Event of Default unless it shall continue for a period of 30 days after any Borrower becomes aware of inaccuracy or untruth, whether by notice from Lender or otherwise; and
(iii)      If a failure described in (ii) above is of such a nature that it cannot reasonably be cured within such 30-day period, and if such failure is susceptible of cure, it shall not constitute an Event of Default if corrective action is instituted by Borrowers within such 30-day period and is diligently pursued and such failure is cured within 120 days after any Borrower becomes aware of such inaccuracy or untruth, whether by notice from Lender or otherwise;


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(e)      The occurrence of a Prohibited Transfer;
(f)      The existence of any collusion, fraud, dishonesty or bad faith by or with the acquiescence of any Borrower or Guarantor which in any way relates to or affects the Loan, any Project or any Facility;
(g)      The occurrence of a material adverse change in the financial condition of any Borrower or Guarantor;
(h)      Any Borrower or Guarantor (i) files a voluntary petition in bankruptcy or is adjudicated a bankrupt or insolvent or files any petition or answer seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under the present or any future federal, state, or other statute or law, or (ii) seeks or consents to or acquiesces in the appointment of any trustee, receiver or similar officer of any Borrower or Guarantor or of all or any substantial part of the property of any Borrower or Guarantor or any portion of any Project or any Facility; or all or a substantial part of the assets of any Borrower or Guarantor are attached, seized, subjected to a writ or distress warrant or are levied upon unless the same is released or vacated within 30 days;
(i)      The commencement of any involuntary petition in bankruptcy against any Borrower or Guarantor or the institution against any Borrower or Guarantor of any reorganization, arrangement, composition, readjustment, dissolution, liquidation or similar proceedings under any present or future federal, state or other statute or law, or the appointment of a receiver, trustee or similar officer for all or any substantial part of the property of any Borrower or Guarantor, which shall remain undismissed or undischarged for a period of 30 days;
(j)      Any of the following: (i) the entry of any judgment, decree, levy, attachment, garnishment or other process, or the filing of any lien or encumbrance, against any of the Collateral, and the same shall not have been, within 30 days from the entry or filing thereof, vacated, satisfied or appealed from and stayed pending appeal; (ii) the loss, theft, destruction, seizure or forfeiture of, or the occurrence of any material deterioration or impairment of, any of the Collateral, (iii) any material decline or depreciation in the value or market price thereof (whether actual or reasonably anticipated), which causes the Collateral, in the sole opinion of Lender acting in good faith, to become unsatisfactory as to value or character, or which causes Lender to reasonably believe that it is insecure and that the likelihood for repayment of the Loan is or will soon be impaired, time being of the essence (it being understood that the cause of such deterioration, impairment, decline or depreciation shall include, but is not limited to, the failure by Borrowers to do any act deemed necessary by Lender to preserve and maintain the value and collectability of the Collateral);
(k)      The entry against any Borrower or Guarantor of any final judgment for the payment of money in an amount in excess of $100,000 and such judgment shall not have been, within 30 days from the entry thereof, vacated, satisfied or appealed from and stayed pending appeal;


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(l)      The dissolution, termination or merger of any Borrower or Guarantor which is an entity, or the occurrence of the death or declaration of legal incompetency of Guarantor who is a natural person;
(m)      The validity or enforceability of this Agreement or any of the other Loan Documents shall be contested by any Borrower, Guarantor or any other party thereto (other than Lender), or any Borrower, Guarantor or any other party thereto (other than Lender) shall deny that it has any or further liability or obligation hereunder or thereunder;
(n)      The occurrence of any Default or Event of Default on the part of any Borrower under its Lease or on the part of Landlord under the Master Lease;
(o)      The occurrence of an Event of Default under the Note or any of the other Loan Documents; or
(p)      The occurrence of either or both of the following: (i) a payment default under the HUD Financing, or (ii) the commencement of any action by FHA Mortgagee under Section 2.3(a) of any of the Intercreditor Agreements.

ARTICLE 11

LENDER’S REMEDIES UPON EVENT OF DEFAULT

11.1      Remedies Conferred upon Lender . During the continuance of any Event of Default under this Agreement, Lender, in addition to all remedies conferred upon Lender by law and by the terms of the Note and the other Loan Documents, may pursue any one or more of the following remedies concurrently or successively, it being the intent hereof that none of such remedies shall be to the exclusion of any others:
(a)      Withhold further disbursement of Loan Proceeds and terminate any of its obligations to Borrowers;
(b)      Declare the Note to be due and payable forthwith, without presentment, demand, protest or other notice of any kind, all of which Borrowers hereby expressly waive, and in the event of the occurrence of an Event of Default under Section 10.1(h) or 10.1(i) of this Agreement, the Note shall automatically become due and payable immediately;
(c)      In addition to any rights of setoff that Lender may have under applicable law, without notice of any kind to Borrowers, appropriate and apply to the payment of the Note or of any sums due under this Agreement any and all balances, deposits, credits, accounts, certificates of deposit, instruments or money of any Borrower then or thereafter in the possession of Lender, other than in a Lessee Rent Account;
(d)      Exercise all of the rights of a secured party under the Code;


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(e)      Exercise collection remedies against Account Debtors directly or through the use of collection agencies and other collection specialists;
(f)      Instruct Borrowers, at their own expense, to notify any parties obligated on any of the Collateral, including any Account Debtors, to make payment directly to Lender of any amounts due or to become due thereunder, or Lender may directly notify such obligors of the security interest of Lender, or of the assignment to Lender of the Collateral and direct such obligors to make payment to Lender of any amounts due or to become due with respect thereto, and thereafter, collect any such amounts due on the Collateral directly from such persons obligated thereon, all except as otherwise restricted by law or other agreement with Borrowers or with FHA Mortgagee while the HUD Financing is in effect;
(g)      Enforce collection of any of the Collateral, including any Accounts, by suit or otherwise, or make any compromise or settlement with respect to any of the Collateral, or surrender, release or exchange all or any part thereof, or compromise, extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder; or
(h)      Exercise or pursue any other remedy or cause of action permitted at law or in equity or under this Agreement or any other Loan Document, including, but not limited to, enforcement of all Loan Documents.
11.2      Possession and Assembly of Collateral . During the continuance of any Event of Default under this Agreement, Lender may, without notice, demand or legal process of any kind, take possession of any or all of the Collateral (in addition to Collateral of which Lender already has possession), wherever it may be found, and for that purpose may pursue the same wherever it may be found, and may at any time enter into any of the premises of any Borrower where any of the Collateral may be or is supposed to be, and search for, take possession of, remove, keep and store any of the Collateral until the same shall be sold or otherwise disposed of and Lender shall have the right to store and conduct a sale of the same in any of any Borrower’s premises without cost to Lender. At Lender’s request, Borrowers will, at Borrowers’ sole expense, assemble the Collateral and make it available to Lender at a place or places to be designated by Lender which is reasonably convenient to Lender and Borrowers.
11.3      Sale of Collateral . During the continuance of any Event of Default under this Agreement, Lender may sell any or all of the Collateral at public or private sale, upon such terms and conditions as Lender may deem proper, and Lender may purchase any or all of the Collateral at any such sale. Borrowers acknowledge that Lender may be unable to effect a public sale of all or any portion of the Collateral because of certain legal and/or practical restrictions and provisions which may be applicable to the Collateral and, therefore, may be compelled to resort to one or more private sales to a restricted group of offerees and purchasers. Borrowers consent to any such private sale so made even though at places and upon terms less favorable than if the Collateral were sold at public sale. Lender shall have no obligation to clean-up or otherwise prepare the Collateral for sale. Lender may apply the net proceeds, after deducting all costs, expenses, and reasonable fees of attorneys and paralegals incurred or paid at any time in the collection, protection and sale of the Collateral and the obligations secured by the Collateral, to the payment of the Note or any of the


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other obligations secured by the Collateral, with the excess proceeds, if any, to be paid to Borrowers, subject to the rights of FHA Mortgagee as the holder of the FHA Permitted Liens if the HUD Financing is outstanding. Borrowers shall remain liable for any amount remaining unpaid after such application, with interest at the Default Rate. Any notification of intended disposition of the Collateral required by law shall be conclusively deemed reasonably and properly given if given by Lender at least 10 calendar days before the date of such disposition. Borrowers hereby confirm, approve and ratify all acts and deeds of Lender relating to the foregoing, and each part thereof, and expressly waives any and all claims of any nature, kind or description which it have or may hereafter have against Lender or its representatives, by reason of taking, selling or collecting any portion of the Collateral. Borrowers consent to releases of the Collateral at any time (including prior to default) and to sales of the Collateral in groups, parcels or portions, or as an entirety, as Lender shall deem appropriate. Borrowers expressly absolves Lender from any loss or decline in market value of any Collateral by reason of delay in the enforcement or assertion or nonenforcement of any rights or remedies under this Agreement.
11.4      Standards for Exercising Remedies . To the extent that applicable law imposes duties on Lender to exercise remedies in a commercially reasonable manner, Borrowers acknowledge and agree that it is not commercially unreasonable for Lender (i) to fail to incur expenses reasonably deemed significant by Lender to prepare Collateral for disposition or otherwise to complete raw material or work-in-process into finished goods or other finished products for disposition, (ii) to fail to obtain third party consents for access to Collateral to be disposed of, or to obtain or, if not required by other law, to fail to obtain governmental or third party consents for the collection or disposition of Collateral to be collected or disposed of, (iii) to fail to exercise collection remedies against Account Debtors or other persons obligated on Collateral or to remove liens or encumbrances on or any adverse claims against Collateral, (iv) to exercise collection remedies against Account Debtors and other persons obligated on Collateral directly or through the use of collection agencies and other collection specialists, (v) to advertise dispositions of Collateral through publications or media of general circulation, whether or not the Collateral is of a specialized nature, (vi) to contact other persons, whether or not in the same business as Borrowers, for expressions of interest in acquiring all or any portion of the Collateral, (vii) to hire one or more professional auctioneers to assist in the disposition of Collateral, whether or not the collateral is of a specialized nature, (viii) to dispose of Collateral by utilizing internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capability of doing so, or that match buyers and sellers of assets, (ix) to dispose of assets in wholesale rather than retail markets, (x) to disclaim disposition warranties, including any warranties of title, (xi) to purchase insurance or credit enhancements to insure Lender against risks of loss, collection or disposition of Collateral or to provide to Lender a guaranteed return from the collection or disposition of Collateral, or (xii) to the extent deemed appropriate by Lender, to obtain the services of other brokers, investment bankers, consultants and other professionals to assist Lender in the collection or disposition of any of the Collateral. Borrowers acknowledge that the purpose of this Section is to provide non-exhaustive indications of what actions or omissions by Lender would not be commercially unreasonable in Lender’s exercise of remedies against the Collateral and that other actions or omissions by Lender shall not be deemed commercially unreasonable solely on account of not being indicated in this Section. Without limitation upon the foregoing, nothing contained in this Section shall be construed to grant any rights to Borrowers or to impose any duties on Lender that would


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not have been granted or imposed by this Agreement or by applicable law in the absence of this Section.
11.5      Code and Offset Rights . Except as otherwise provided in Section 3.7 of this Agreement, Lender may exercise, from time to time, any and all rights and remedies available to it under the Code or under any other applicable law in addition to, and not in lieu of, any rights and remedies expressly granted in this Agreement or in any other Loan Document, and may, without demand or notice of any kind, appropriate and apply toward the payment of such of the obligations under the Loan Documents, whether matured or unmatured, including costs of collection and reasonable fees of attorneys and paralegals, and in such order of application as Lender may, from time to time, elect, any indebtedness of Lender to Borrowers or any other person obligated for any of the obligations under the Loan Documents, however created or arising, including balances, credits, deposits, accounts or moneys of Borrowers or any such other person in the possession, control or custody of, or in transit to Lender. Borrowers, on behalf of themselves and each such other person, hereby waives the benefit of any law that would otherwise restrict or limit Lender in the exercise of its right, which is hereby acknowledged, to appropriate at any time hereafter any such indebtedness owing from Lender to any such other person.
11.6      Additional Remedies . Lender shall have the right and power to --
(a)      Instruct Borrowers, at their own expense, to notify any parties obligated on any of the Collateral, including any Account Debtors, to make payment directly to Lender of any amounts due or to become due thereunder, or Lender may directly notify such obligors of the security interest of Lender, or of the assignment to Lender of the Collateral, and direct such obligors to make payment to Lender of any amounts due or to become due with respect thereto, and thereafter, collect any such amounts due on the Collateral directly from such persons obligated thereon;
(b)      Enforce collection of any of the Collateral, including any Accounts, by suit or otherwise, or make any compromise or settlement with respect to any of the Collateral, or surrender, release or exchange all or any part thereof, or compromise, extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder;
(c)      Take possession or control of any proceeds and products of any of the Collateral, including the proceeds of insurance thereon;
(d)      Extend, renew or modify for one or more periods (whether or not longer than the original period) the Note, any other obligations under any of the Loan Documents, or any obligation of any nature of any other obligor with respect to the Note or any of the obligations under any of the Loan Documents;
(e)      Grant releases, compromises or indulgences with respect to the Note or any of the other obligations under any of the Loan Documents, or any extension or renewal of the Note or such other obligations, or any security therefor, or to any other obligor with respect to the Note or any of such other obligations;


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(f)      Transfer the whole or any part of securities which may constitute Collateral into the name of Lender or Lender’s nominee without disclosing, if Lender so desires, that such securities so transferred are subject to the security interest of Lender, and any corporation, association, or any of the managers or trustees of any trust issuing any of such securities, or any transfer agent, shall not be bound to inquire, in the event that Lender or such nominee makes any further transfer of such securities, or any portion thereof, as to whether Lender or such nominee has the right to make such further transfer, and shall not be liable for transferring the same;
(g)      Vote the Collateral;
(h)      Make an election with respect to the Collateral under Section 1111 of Bankruptcy Code or take action under Section 364 or any other section of Bankruptcy Code; provided, however, that any such action of Lender as set forth herein shall not, in any manner whatsoever, impair or affect the liability of Borrowers hereunder, nor prejudice, waive, nor be construed to impair, affect, prejudice or waive Lender’s rights and remedies at law, in equity or by statute, nor release, discharge, nor be construed to release or discharge, Borrowers, any guarantor or other person liable to Lender for the Loan or any of the other obligations under the Loan Documents; and
(i)      At any time, and from time to time, accept additions to, releases, reductions, exchanges or substitution of the Collateral, without in any way altering, impairing, diminishing or affecting the provisions of this Agreement, the Loan Documents, or any of the obligations under the Loan Documents, or Lender’s rights hereunder or under the Note.
Borrowers hereby ratify and confirm whatever Lender may do with respect to the Collateral and agrees that Lender shall not be liable for any error of judgment or mistakes of fact or law with respect to actions taken in connection with the Collateral.
11.7      Right of Lender to Make Advances to Cure Event of Defaults; Obligatory Advances . If Borrowers shall fail to perform any of their covenants or agreements herein or in any of the other Loan Documents contained, Lender may (but shall not be required to) perform any of such covenants and agreements, and any amounts expended by Lender in a commercially reasonable manner in so doing, and any amounts expended by Lender in a commercially reasonable manner pursuant to Sections 11.1 through 11.6 hereof and any amounts advanced by Lender in a commercially reasonable manner pursuant to this Agreement shall be deemed advanced by Lender under an obligation to do so regardless of the identity of the person or persons to whom said funds are disbursed. Loan Proceeds advanced by Lender to protect its security for the Loan are obligatory advances hereunder and shall constitute additional indebtedness payable on demand and evidenced and secured by the Loan Documents, subject to the further condition that so long as the HUD Financing is outstanding, such advances shall be limited to advances that are commercially reasonable and reasonably necessary to preserve and protect the AR Lender Priority Collateral.
11.8      Attorney-in-Fact . Each Borrower hereby irrevocably makes, constitutes and appoints Lender (and any officer of Lender or any person designated by Lender for that purpose) as such Borrower’s true and lawful proxy and attorney-in-fact (and agent-in-fact) in such Borrower’s


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name, place and stead, with full power of substitution, to (i) take such actions as are expressly permitted in this Agreement, (ii) execute such financing statements and other documents and to do such other acts as Lender may require to perfect and preserve Lender’s security interest in, and during the existence of an Event of Default hereunder, to enforce such interests in the Collateral, and (iii) during the existence of an Event of Default hereunder, carry out any remedy provided for in this Agreement, including endorsing such Borrower’s name to checks, drafts, instruments and other items of payment, and proceeds of the Collateral, executing change of address forms with the postmaster of the United States Post Office serving the address of such Borrower, changing the address of such Borrower to that of Lender, opening all envelopes addressed to such Borrower and applying any payments contained therein to the amounts due to Lender. Each Borrower hereby acknowledges that the constitution and appointment of such proxy and attorney-in-fact are coupled with an interest and are irrevocable. Each Borrower hereby ratifies and confirms all that such attorney-in-fact may do or cause to be done by virtue of any provision of this Agreement.
11.9      No Marshalling . Lender shall not be required to marshal any present or future collateral security (including this Agreement and the Collateral) for, or other assurances of payment of, the obligations of Borrowers, or any of them or to resort to such collateral security or other assurances of payment in any particular order. To the extent that it lawfully may, Borrowers hereby agree that they will not invoke any law relating to the marshalling of collateral which might cause delay in or impede the enforcement of Lender’s rights under this Agreement or under any other instrument creating or evidencing any of Borrowers’ obligations or under which any of such obligations is outstanding or by which any of such obligations is secured or payment thereof is otherwise assured, and, to the extent that it lawfully may, Borrowers hereby irrevocably waives the benefits of all such laws.
11.10      Application of Proceeds . Lender will within three business days after receipt of cash or solvent credits from collection of items of payment, proceeds of Collateral or any other source, apply the whole or any part thereof against the obligations secured hereby. Lender shall further have the exclusive right to determine how, when and what application of such payments and such credits shall be made on such obligations, and such determination shall be conclusive upon Borrowers. Any proceeds of any disposition by Lender of all or any part of the Collateral may be first applied by Lender to the payment of expenses incurred by Lender in connection with the Collateral, including attorneys’ fees and legal expenses as provided for in Section 11.11 hereof.
11.11      Attorneys’ Fees . Borrowers shall pay Lender’s reasonable attorneys’ fees and costs in connection with the negotiation, preparation and administration of this Agreement and shall pay Lender’s reasonable attorneys’ fees and costs in connection with the administration and enforcement of this Agreement and the other Loan Documents, which shall also include reasonable attorneys’ fees and time charges of attorneys who may be employees of Lender or any affiliate of Lender. Without limiting the generality of the foregoing, if at any time or times hereafter Lender employs counsel for advice or other representation with respect to any matter concerning Borrowers, this Agreement, the Projects, the Facilities or the Loan Documents or if Lender employs one or more counsel to protect, collect, lease, sell, take possession of, or liquidate any portion of any Project or any Facility, or to attempt to enforce or protect any security interest or lien or other right in any portion of any Project or any Facility or under any of the Loan Documents, or to enforce any rights


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of Lender or obligations of Borrowers or any other person, firm or corporation which may be obligated to Lender by virtue of this Agreement or under any of the Loan Documents or any other agreement, instrument or document, heretofore or hereafter delivered to Lender in furtherance hereof, then in any such event, all of the attorneys’ fees arising from such services and actually incurred, and any expenses, costs and charges relating thereto and actually incurred, shall constitute an additional indebtedness owing by Borrowers to Lender payable on demand and evidenced and secured by the Loan Documents.
11.12      No Waiver . No failure by Lender to exercise, or delay by Lender in exercising, any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof, or the exercise of any other right, power or privilege. The rights and remedies provided in this Agreement and in the Loan Documents are cumulative and not exclusive of each other or of any right or remedy provided at law or in equity. No notice to or demand on Borrowers in any case, in itself, shall entitle Borrowers to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of Lender to any other or further action in any circumstances without notice or demand.
11.13      Default Rate . During the continuance of any Event of Default under this Agreement or any of the other Loan Documents, interest on funds outstanding hereunder shall accrue at the Default Rate and be payable on demand. The failure of Lender to charge interest at the Default Rate shall not be evidence of the absence of an Event of Default or waiver of an Event of Default by Lender.

ARTICLE 12

MISCELLANEOUS

12.1      Time is of the Essence . Borrowers agree that time is of the essence in all of their covenants under this Agreement.
12.2      Joint and Several Obligations; Full Collateralization .
(a)      Each Borrower shall be jointly and severally liable for all of the obligations of all Borrowers under this Agreement and the other Loan Documents, regardless of the amount of the Loan Proceeds that is actually disbursed to or for the benefit of each Borrower, or the manner in which Borrowers or Lender account for the Loan in their respective books and records. All of the collateral provided by each Borrower shall secure all of the obligations of all Borrowers under this Agreement and the other Loan Documents, regardless of the amount of the Loan Proceeds that is actually disbursed to or for the benefit of each Borrower.
(b)      Each Borrower acknowledges that Lender has advised Borrowers that Lender is unwilling to provide the Loan to Borrowers unless each Borrower agrees to the joint and several liability and full collateralization described in paragraph (a) above. Each Borrower has determined that it is in its best interest to undertake such joint and several liability and full collateralization,


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because of, among other things (i) the benefit to each Borrower of being able to obtain the Loan and the desirability of the terms and conditions of the Loan, (ii) the benefit and economies to be realized by Borrowers in obtaining the Loan as a single loan facility as compared to each Borrower’s obtaining an individual loan facility for its Facility, and (iii) the fact that each Borrower is an Affiliate of each of the other Borrowers.
(c)      The obligations of each Borrower under this Agreement and the other Loan Documents, including, without limitation, the joint and several liability and full collateralization as described in paragraph (a) above, shall be continuing and shall be binding upon each of them, and shall remain in full force and effect, and shall not be discharged, impaired or affected by (i) the power or authority of any other Borrower to execute, acknowledge or deliver this Agreement or any of the other Loan Documents; (ii) the existence or continuance of any obligation on the part of any other Borrower under this Agreement or any of the other Loan Documents; (iii) the validity or invalidity of the obligations of any other Borrower under this Agreement or any of the other Loan Documents; (iv) any defense, setoff or counterclaim whatsoever that any other Borrower may or might have to the performance or observance of the obligations under this Agreement or any of the other Loan Documents or to the performance or observance of any of the terms, provisions, covenants and agreements contained in this Agreement or any of the other Loan Documents, including, without limitation, any defense based on any alleged failure of Lender to comply with the implied covenant of good faith and fair dealing, or any limitation or exculpation of liability on the part of any other Borrower; (v) the existence or continuance of any other Borrower as a legal entity; (vi) the transfer by any other Borrower of all or any part of the property encumbered by the Loan Documents; (vii) any sale, pledge, assignment, surrender, indulgence, alteration, substitution, exchange, extension, renewal, release, compromise, change in, modification or other disposition of any of the obligations of any other Borrower or of any of the Loan Documents, all of which Lender is hereby expressly authorized to make from time to time without notice to Borrowers or any of them, or to anyone; (viii) the acceptance by Lender of the primary or secondary obligation of any party with respect to, or any security for, all or any part of the obligations under this Agreement or any of the other Loan Documents; or (ix) any failure, neglect or omission on the part of Lender to realize or protect any of the obligations under this Agreement or any of the other Loan Documents or any collateral or appropriation of any moneys, credits or property of Borrowers toward the liquidation of the obligations under this Agreement or any of the other Loan Documents or by any application of any moneys received by Lender under the Loan Documents. The obligations of Borrowers and each of them under this Agreement and under the other Loan Documents, including, without limitation, the joint and several liability and full collateralization as described in paragraph (a) above, shall not be affected, discharged, impaired or varied by any act, omission or circumstance whatsoever, whether or not specifically enumerated above, except the due and punctual payment, performance and observance of all of the obligations of Borrowers under this Agreement and the other Loan Documents, and then, in each case, only to the extent thereof.
(d)      Lender shall have the right to enforce this Agreement and the other Loan Documents against any Borrower with or without enforcing or attempting to enforce the same against any other Borrower or any security for the obligation of any of them, and whether or not other proceedings or steps are pending or have been taken or have been concluded to enforce or otherwise realize upon any security for the Loan or any guaranty of the Loan. The payment of any amount or amounts by any Borrower, pursuant to its obligation under this Agreement or any of the other Loan


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Documents, including, without limitation, pursuant to the joint and several liability provided for herein, shall not in any way entitle such Borrower, either at law, or in equity or otherwise, to any right, title or interest in and to this Agreement, the Note, or any of the other Loan Documents, or any principal or interest payments theretofore, then or thereafter at any time made by anyone on behalf of any Borrower, or in and to any security therefor, or to any right of recovery against any Borrower, in each case whether by way of indemnity, reimbursement, contribution, subrogation or otherwise, and Borrowers hereby waive and relinquish any and all such right, title and interest in and to the Note, such other obligations, such principal and interest payments, and such security and any and all such rights of recovery against Borrowers. In addition, each Borrower hereby subordinates all obligations of every sort whatsoever now or hereafter coming due to such Borrower from any other Borrower, to the Loan and the Note and to all other amounts coming due to Lender under the Loan Documents.
12.3      Lender’s Determination of Facts; Lender Approvals and Consents .
(a)      Lender at all times shall be free to establish independently to its satisfaction and in its sole and absolute discretion the existence or nonexistence of any fact or facts, the existence or nonexistence of which is a condition of this Agreement.
(b)      Wherever in this Agreement or any of the other Loan Documents provision is made for the approval or consent of Lender or counsel to Lender, or that any matter is to be to the satisfaction of or as required by Lender or counsel to Lender, or that any matter is to be as estimated or determined by Lender, or the like, unless specifically stated to the contrary, such approval, consent, satisfaction, requirement, estimate or determination or the like shall be in the sole and absolute discretion of Lender or counsel to Lender, as the case may be.
(c)      Notwithstanding any other provision of this Agreement or the other Loan Documents, wherever in this Agreement or any of the other Loan Documents provision is made for the approval or consent of Lender with respect to a matter, if Lender elects to grant such approval or consent, it shall not be unreasonable for Lender to make such approval or consent subject to the condition that such matter must also be approved or consented to in writing by Guarantor, any other guarantors of the Loan, and any parties other than Borrowers that have provided collateral for the Loan.
12.4      Prior Agreements; No Reliance; Modifications . This Agreement and the other Loan Documents, and any other documents or instruments executed pursuant thereto or contemplated thereby, shall represent the entire, integrated agreement between the parties hereto with respect to the subject matter of this Agreement, and shall supersede all prior negotiations, representations or agreements pertaining thereto, either oral or written. Borrowers acknowledge that they are executing this Agreement without relying on any statements, representations or warranties, either oral or written, that are not expressly set forth herein. This Agreement and any provision hereof shall not be modified, amended, waived or discharged in any manner other than by a written amendment executed by all parties to this Agreement.
12.5      Disclaimer by Lender . Borrowers are not or shall not be an agent of Lender for any purposes, and Lender is not a venture partner with any Borrower in any manner whatsoever. Approvals granted by Lender for any matters covered under this Agreement shall be narrowly


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construed to cover only the parties and facts identified in any written approval or, if not in writing, such approvals shall be solely for the benefit of Borrowers.
12.6      Loan Expenses; Indemnification . Borrowers shall pay all Loan Expenses promptly upon demand therefor by Lender. To the fullest extent permitted by law, Borrowers hereby agree to protect, indemnify, defend and save harmless, Lender and its directors, officers, agents and employees from and against any and all liability, expense or damage of any kind or nature and from any suits, claims or demands, including legal fees and expenses on account of any matter or thing or action or failure to act by Lender, whether or not arising from a claim by a third party, and whether or not in litigation, arising out of this Agreement or in connection herewith, unless such suit, claim or damage is caused solely by any act, omission or willful malfeasance of Lender, its directors, officers, agents and authorized employees. This indemnity is not intended to excuse Lender from performing hereunder. This obligation on the part of Borrowers shall survive the closing of the Loan, the repayment thereof and any cancellation of this Agreement. Borrowers shall pay, and hold Lender harmless from, any and all claims of any brokers, finders or agents claiming a right to any fees in connection with arranging the financing contemplated hereby. Lender hereby represents and warrants that it has not employed a broker or other finder in connection with the Loan. Each Borrower hereby represents and warrants that no brokerage commissions or finder’s fees are to be paid in connection with the Loan. However, while the HUD Financing is in effect, in no event shall the cost of such indemnification come from any Project proceeds, nor shall it become a lien against any Project, the FHA Mortgagee’s Priority Collateral, or the AR Lender Priority Collateral. In no event shall any attorney’s fees referred to in this or any other provision of this Agreement which are incurred in connection with any dispute relating to the HUD Financing be secured by the AR Lender Priority Collateral, and this sentence shall not be construed as permitting any attorney’s fees which are incurred in connection with any dispute not relating to the HUD Financing to be secured by the AR Lender Priority Collateral so long as the HUD Financing is in effect.
12.7      Captions . The captions and headings of various Articles and Sections of this Agreement and exhibits pertaining hereto are for convenience only and are not to be considered as defining or limiting in any way the scope or intent of the provisions hereof.
12.8      Inconsistent Terms and Partial Invalidity . In the event of any inconsistency among the terms hereof (including incorporated terms), or between such terms and the terms of any other Loan Document, Lender may elect which terms shall govern and prevail. If any provision of this Agreement, or any section, paragraph, sentence, clause, phrase or word, or the application thereof, in any circumstances, is adjudicated by a court of competent jurisdiction to be invalid, the validity of the remainder of this Agreement shall be construed as if such invalid part were never included herein.
12.9      Gender and Number . Any word herein which is expressed in the masculine or neuter gender shall be deemed to include the masculine, feminine and neuter genders. Any word herein which is expressed in the singular or plural number shall be deemed, whenever appropriate in the context, to include the singular and the plural.


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12.10      Notices . All notices and other communications provided for in this Agreement ( “ Notices ” ) shall be in writing. The “ Notice Addresses ” of the parties for purposes of this Agreement are as follows:
Borrowers:
Woodland Manor Nursing, LLC
Glenvue H&R Nursing, LLC
1145 Hembree Road
Roswell, Georgia 30076
Attention: David Rubenstein
With copies to:
Holt Ney Zatcoff & Wasserman, LLP
100 Galleria Parkway, Suite 1800
Atlanta, Georgia 30339
Attention: Gregory P. Youra
 
Housing & Healthcare Finance, LLC
2 Wisconsin Circle, Suite 540
Chevy Chase, Maryland 20815
Attention: Erik Lindenauer
 
U.S. Department of Housing and Urban Development
Office of Residential Care Facilities
451 Seventh Street SW
Washington, DC 20410
Lender:
The PrivateBank and Trust Company
120 South LaSalle Street
Chicago, Illinois 60603
Attention: Amy K. Hallberg
With a copy to:
Seyfarth Shaw LLP
131 South Dearborn Street
Suite 2400
Chicago, Illinois 60603
Attention: Alvin L. Kruse

or such other address as a party may designate by notice duly given in accordance with this Section to the other parties. A Notice to a party shall be effective when delivered to such party’s Notice Address by any means, including, without limitation, personal delivery by the party giving the Notice, delivery by United States regular, certified or registered mail, or delivery by a commercial courier or delivery service. If the Notice Address of a party includes a facsimile number or electronic mail address, Notice given by facsimile or electronic mail shall be effective when delivered at such facsimile number or email address. If delivery of a Notice is refused, it shall be deemed to have been delivered at the time of such refusal of delivery. The party giving a Notice shall have the burden of establishing the fact and date of delivery or refusal of delivery of a Notice.



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12.11      Effect of Agreement . The submission of this Agreement and the Loan Documents to Borrowers for examination does not constitute a commitment or an offer by Lender to make a commitment to lend money to Borrowers; this Agreement shall become effective only upon execution and delivery hereof by Lender to Borrowers.
12.12      Construction . Each party to this Agreement and legal counsel to each party have participated in the drafting of this Agreement, and accordingly the general rule of construction to the effect that any ambiguities in a contract are to be resolved against the party drafting the contract shall not be employed in the construction and interpretation of this Agreement.
12.13      Governing Law . This Agreement has been negotiated, executed and delivered at Chicago, Illinois, and shall be construed and enforced in accordance with the laws of the State of Illinois.
12.14      Litigation Provisions .
(a)      EACH BORROWER CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN CHICAGO, ILLINOIS, AND OF ANY STATE OR FEDERAL COURT LOCATED OR HAVING JURISDICTION IN THE COUNTY IN WHICH ITS FACILITY IS LOCATED, IN WHICH ANY LEGAL PROCEEDING MAY BE COMMENCED OR PENDING RELATING IN ANY MANNER TO THIS AGREEMENT, THE LOAN OR ANY OF THE OTHER LOAN DOCUMENTS.
(b)      EACH BORROWER AGREES THAT ANY LEGAL PROCEEDING RELATING TO THIS AGREEMENT, THE LOAN OR ANY OF THE OTHER LOAN DOCUMENTS MAY BE BROUGHT AGAINST SUCH BORROWER IN ANY STATE OR FEDERAL COURT LOCATED IN CHICAGO, ILLINOIS, OR ANY STATE OR FEDERAL COURT LOCATED OR HAVING JURISDICTION IN THE COUNTY IN WHICH ITS FACILITY IS LOCATED. EACH BORROWER WAIVES ANY OBJECTION TO VENUE IN ANY SUCH COURT AND WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE VENUE FROM ANY SUCH COURT.
(c)      BORROWER AGREES THAT IT WILL NOT COMMENCE ANY LEGAL PROCEEDING AGAINST LENDER RELATING IN ANY MANNER TO THIS AGREEMENT, THE LOAN OR ANY OF THE OTHER LOAN DOCUMENTS IN ANY COURT OTHER THAN A STATE OR FEDERAL COURT LOCATED IN CHICAGO, ILLINOIS, OR IF A LEGAL PROCEEDING IS COMMENCED BY LENDER AGAINST BORROWER IN A COURT IN ANOTHER LOCATION, BY WAY OF A COUNTERCLAIM IN SUCH LEGAL PROCEEDING.
(d)      EACH BORROWER HEREBY WAIVES TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATING TO THIS AGREEMENT, THE LOAN OR ANY OF THE OTHER LOAN DOCUMENTS.
12.15      Counterparts; Electronic Signatures . This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but


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one and the same Agreement. Receipt of an executed signature page to this Agreement by facsimile or other electronic transmission shall constitute effective delivery thereof. Electronic records of executed Loan Documents maintained by Lender shall be deemed to be originals thereof.
12.16      Customer Identification-USA Patriot Act Notice; OFAC and Bank Secrecy Act . Lender hereby notifies Borrowers that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56, signed into law October 26, 2001) (the “ Act ” ), and Lender’s policies and practices, Lender is required to obtain, verify and record certain information and documentation that identifies Borrowers, which information includes the name and address of Borrowers and such other information that will allow Lender to identify Borrowers in accordance with the Act. In addition, Borrowers shall (i) ensure that no person who owns a controlling interest in or otherwise controls Borrowers or any subsidiary of Borrowers is or shall be listed on the Specially Designated Nationals and Blocked Person List or other similar lists maintained by the Office of Foreign Assets Control ( “ OFAC ” ), the Department of the Treasury, or included in any Executive Orders, (ii) not use or permit the use of Loan Proceeds to violate any of the foreign asset control regulations of OFAC or any enabling statute or Executive Order relating thereto, and (iii) comply, and cause any of its subsidiaries to comply, with all applicable Bank Secrecy Act laws and regulations, as amended.
[SIGNATURE PAGE(S) AND EXHIBIT(S),
IF ANY, FOLLOW THIS PAGE]



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IN WITNESS WHEREOF , Borrowers and Lender have caused this Agreement to be executed the day and year first above written.
WOODLAND MANOR NURSING, LLC
GLENVUE H&R NURSING, LLC
 
By     /s/ David Rubenstein                                                          
             David Rubenstein, Manager of each Borrower
 
THE PRIVATEBANK AND TRUST COMPANY
 
By     /s/ Amy K. Hallberg                                                           
             Amy K. Hallberg, Managing Director






EXHIBIT A

DIRECT AND INDIRECT OWNERSHIP OF BORROWERS

AdCare Health Systems, Inc., a Georgia corporation, owns 100% of the membership interests in AdCare Operations, LLC, a Georgia limited liability company, which in turn owns 100% of the membership interests in each of Borrower 1 and Borrower 2.





Exhibit 10.22
Surplus Cash Note
Section 232
U.S. Department of Housing
and Urban Development
Office of Residential
Care Facilities
OMB Approval No. 2502-0605
(exp. 03/31/2014)


Public reporting burden for this collection of information is estimated to average 0.5 hours. This includes the time for collecting, reviewing, and reporting the data. The information is being collected to obtain the supportive documentation which must be submitted to HUD for approval, and is necessary to ensure that viable projects are developed and maintained. The Department will use this information to determine if properties meet HUD requirements with respect to development, operation and/or asset management, as well as ensuring the continued marketability of the properties. This agency may not collect this information, and you are not required to complete this form, unless it displays a currently valid OMB control number. 

Warning: Any person who knowingly presents a false, fictitious, or fraudulent statement or claim in a matter within the jurisdiction of the U.S. Department of Housing and Urban Development is subject to criminal penalties, civil liability, and administrative sanctions. 

Project Name: Eaglewood Care Center (a.k.a. Woodland Manor)
FHA Project No: 043-22101



FOR VALUE RECEIVED, Woodland Manor Property Holdings, LLC, a limited liability company organized and existing under the laws of Georgia (“ Maker ”) promises to pay to AdCare Administrative Services, LLC, a limited liability company organized and existing under the laws of Georgia (“ Payee ”) the sum of One Hundred Fifty-Five Thousand Seven Hundred Thirty-Three and 00/100 Dollars ($155,733.00), payable at 1145 Hembree Road, Roswell, Georgia 30076, shall be due and payable on October 1, 2044 (the “ Maturity Date ”). (The definition of any capitalized term or word used herein but not defined shall have the meaning given such term in that certain Healthcare Regulatory Agreement - Borrower between Maker and the U.S. Department of Housing and Urban Development (“ HUD ”) (the “ Borrower’s Regulatory Agreement ”), and/or the Borrower’s Security Instrument, as defined below.)

This Surplus Cash Note is subject to the following terms and conditions:

1. In the event that the maturity date of that certain Open End HealthcareMortgage Deed, Assignment of Leases, Rents and Revenue and Security Agreement, dated as of the date of this Note in the principal amount of ($5,678,400.00) made by Maker to Housing & Healthcare Finance, LLC (“ Lender ”) in connection with the Project referenced above (the “ Borrower’s Security Instrument ”) is extended and such extension is approved by HUD then in such event the Maturity Date shall automatically be extended to the extended maturity date of the Borrower’s Security Instrument without further consent of Payee.

2. Except as provided in Section 5 below, as long as HUD is the insurer or holder of the Note secured by the Borrower’s Security Instrument, payments due under this Surplus Cash Note shall be payable only from Surplus Cash. The restriction on payment imposed by this Section shall not excuse any default caused by the failure of Maker to pay the indebtedness evidenced by this Surplus Cash Note.

3. In the event the Indebtedness secured by the Borrower’s Security Instrument is paid in full and the Borrower’s Security Instrument released of record, then the holder of this

{1020/124/00098884.3}
 
 
Previous versions obsolete
Page 1  of 3
form HUD-92223-ORCF  (Rev. 03/13)
                         



Surplus Cash Note may, at its option, declare the whole principal sum or any balance thereof, together with interest thereon, immediately due and payable. Notwithstanding the foregoing, in the event said indebtedness is paid in full by way of any substitute indebtedness of Maker secured by any substitute security instrument insured or held by HUD under Section 223(a)(7) of the National Housing Act, as amended, the Maturity Date of this Surplus Cash Note shall automatically be extended to the maturity date of the substitute security instrument without the consent of Payee.

4. Maker may pay any part or all of the principal of this Surplus Cash Note on any interest payment date, provided no such prepayment of principal in any amount or any payment of interest shall be made except from Surplus Cash in accordance with the conditions prescribed in the Borrower’s Regulatory Agreement.

5. Notwithstanding the provisions of Sections 2, 4 and 7, Maker may also make payments due hereunder from sources other than income of the Project or Project Assets.

6. Any unauthorized payments, as determined by HUD, shall be returned to the Project.

7. Except as permitted pursuant to Section 5 hereof, no prepayment of this Surplus Cash Note shall be made until after final endorsement for mortgage insurance by HUD of the Note, unless such prepayment is made from non-Project sources.

8. This Surplus Cash Note is non-negotiable.

9. Interest on this Surplus Cash Note shall not be compounded as long as HUD is the insurer or holder of the Note secured by the Borrower’s Security Instrument.

10. Maker hereby waives presentment, demand, protest and notice of demand, protest and nonpayment of this Surplus Cash Note.

11.     The terms and provisions of this Surplus Cash Note are also for the benefit of and are enforceable by HUD against any party hereto, their successors and assigns. This Surplus Cash Note shall not be modified or amended without the written consent of HUD.




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IN WITNESS WHEREOF , Maker has executed this Surplus Cash Note on this 24th day of September , 2014.     

 
MAKER:
 
 
 
WOODLAND MANOR PROPERTY HOLDINGS, LLC
 
By: /s/ Ronald W. Fleming
 
Manager
 
 

                
Maker and Payee hereby certify that this is a bona fide transaction and that they fully understand all the requirements of this Surplus Cash Note, and that no prepayment of principal or interest shall be made or accepted without evidence that HUD has authorized such prepayment, unless such prepayment is from Surplus Cash or non-Project sources as described in Sections 2 and 5. If an unauthorized prepayment is made or accepted, the funds shall be returned to the Project immediately upon discovery.

Maker and Payee hereby certify that the statements and representations of fact contained in this instrument and all documents in connection with this transaction are, to the best of their knowledge, true, accurate, and complete.  This instrument has been made, presented, and delivered for the purpose of influencing an official action of HUD in insuring the Loan, and may be relied upon by HUD as a true statement of the facts contained therein.
                                                                        

                    

 
MAKER:
 
 
 
WOODLAND MANOR PROPERTY HOLDINGS, LLC
 
By: /s/ Ronald W. Fleming
 
Manager
 
 
 
PAYEE:
 
 
 
ADCARE ADMINISTRATIVE SERVICES, LLC
 
By: /s/ Ronald W. Fleming
 
Manager

                    

                    

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Exhibit 10.23

Security Instrument/ Mortgage/Deed of Trust
Section 232
U.S. Department of Housing
and Urban Development
Office of Residential
Care Facilities
OMB Approval No. 2502-0605
(exp. 06/30/2017)

Public reporting burden for this collection of information is estimated to average 0.5 hours. This includes the time for collecting, reviewing, and reporting the data. The information is being collected to obtain the supportive documentation which must be submitted to HUD for approval, and is necessary to ensure that viable projects are developed and maintained. The Department will use this information to determine if properties meet HUD requirements with respect to development, operation and/or asset management, as well as ensuring the continued marketability of the properties. This agency may not collect this information, and you are not required to complete this form, unless it displays a currently valid OMB control number.

Warning: Any person who knowingly presents a false, fictitious, or fraudulent statement or claim in a matter within the jurisdiction of the U.S. Department of Housing and Urban Development is subject to criminal penalties, civil liability, and administrative sanctions.


OPEN-END HEALTHCARE MORTGAGE DEED ,
ASSIGNMENT OF LEASES, RENTS AND REVENUE
AND SECURITY AGREEMENT
(OHIO)



FHA Project Number: 043-22101
Project Name: EAGLEWOOD CARE CENTER


Document Prepared by, and
After recording return to:
Jeremy F. Segall, Esq.
GUTNICKI LLP
4711 Golf Rd., Ste. 200
Skokie, Illinois 60076

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TABLE OF CONTENTS
SECTION
 
PAGE
1
Definitions.........................................................................
 
5
2
Uniform Commercial Code Security Agreement..............
 
14
3
Control of Deposit Accounts.............................................
 
15
4
Assignment of Leases; Leases Affecting the
 
 
 
Mortgaged Property ..........................................................
 
16
5
Payment of Indebtedness; Performance Under the Loan
 
 
 
Documents; Prepayment Premium…................................
 
17
6
Exculpation .......................................................................
 
17
7
Deposits for Taxes, Insurance and Other Charges.............
 
18
8
Imposition Deposits ..........................................................
 
19
9
Regulatory Agreement ......................................................
 
20
10
Application of Payments ..................................................
 
21
11
Compliance with Laws......................................................
 
21
12
Use of Property .................................................................
 
21
13
Protection of Lender’s Security ........................................
 
22
14
Inspection ..........................................................................
 
22
15
Books and Records; Financial Reporting..........................
 
22
16
Taxes; Operating Expenses ...............................................
 
23
17
Liens; Encumbrances ........................................................
 
23
18
Preservation, Management and Maintenance of
 
 
 
the Mortgaged Property.....................................................
 
24
19
Property and Liability Insurance.......................................
 
24
20
Condemnation ..................................................................
 
27
21
Transfers of the Mortgaged Property or Interests in
 
 
 
Borrower ..........................................................................
 
27
22
Events of Default..............................................................
 
28
23
Remedies Cumulative ......................................................
 
29
24
Forbearance.......................................................................
 
29
25
Loan Charges……………………………………….........
 
30
26
Waiver of Statute of Limitations.......................................
 
30
27
Waiver of Marshalling ......................................................
 
30
28
Further Assurances............................................................
 
30
29
Estoppel Certificate...........................................................
 
31
30
Governing Law; Consent to Jurisdiction and Venue ........
 
31
31
Notice ...............................................................................
 
31
32
Sale of Note; Change in Servicer .....................................
 
32
33
Single Asset Borrower .....................................................
 
32
 
 
 
 

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34
Successors and Assigns Bound ........................................
 
33
35
Joint and Several Liability ...............................................
 
33
36
Relationships of Parties; No Third Party Beneficiary.......
 
33
37
Severability; Amendments................................................
 
33
38
Rules of Construction ......................................................
 
33
39
Loan Servicing .................................................................
 
34
40
Disclosure of Information ................................................
 
34
41
No Change in Facts or Circumstances .............................
 
34
42
Estoppel............................................................................
 
34
43
Acceleration; Remedies ...................................................
 
34
44
Federal Remedies .............................................................
 
35
45
Remedies for Waste .........................................................
 
35
46
Termination of HUD Rights and References ...................
 
35
47
[Construction Financing] .................................................
 
35
48
Environmental Hazards ...................................................
 
36
49
Counterpart Signatures.....................................................
 
43
50
[State Law Requirements]………………………............
 
43
51
Attached Exhibits……………………………………......
 
43
 
 
 
 




EXHIBIT A  - LEGAL DESCRIPTION OF THE LAND ................................................
45

EXHIBIT B  - MODIFICATION TO THE SECURITY INSTRUMENT..........................
46

         
        




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OPEN-END  HEALTHCARE MORTGAGE DEED,
ASSIGNMENT OF LEASES, RENTS AND REVENUE AND
SECURITY AGREEMENT

THIS OPEN-END HEALTHCARE MORTGAGE DEED , ASSIGNMENT OF LEASES, RENTS AND REVENUE AND SECURITY AGREEMENT, WHICH, FOR AS LONG AS THE LOAN IS INSURED OR HELD BY HUD, SHALL BE DEEMED TO BE THE MORTGAGE AS DEFINED BY PROGRAM OBLIGATIONS (this “ Security Instrument ”), is made as of this 24th day of September, 2014, by and between WOODLAND MANOR PROPERTY HOLDINGS, LLC, a limited liability company organized and existing under the laws of Georgia, whose address is 1145 Hembree Rd., Roswell, Georgia 30076, as grantor, trustor and borrower (“ Borrower ”), to HOUSING & HEALTHCARE FINANCE, LLC, as Lender (“ Lender ”), a limited liability company organized and existing under the laws of Delaware, whose address is 2 Wisconsin Circle, Suite 540, Chevy Chase, Maryland 20815.

Borrower, in consideration of the Indebtedness and the security interest created by this Security Instrument, irrevocably mortgages, grants, conveys and assigns to Lender and Lender’s successors and assigns, with power of sale, the Mortgaged Property, including the Land located in Clark County, State of Ohio and described in Exhibit A , attached to and incorporated in this Security Instrument, to have and to hold the Mortgaged Property unto Lender and Lender’s successors and assigns.

TO SECURE TO LENDER the repayment of the Indebtedness evidenced by the Note from Borrower payable to Lender dated as of the date of this Security Instrument, and maturing on October 1, 2044, in the principal amount of FIVE MILLION SIX HUNDRED SEVENTY EIGHT THOUSAND FOUR HUNDRED and NO/100 Dollars ($5,678,400.00) (the “ Loan ”), and all renewals, extensions and modifications of the Indebtedness, and the performance of the covenants and agreements of Borrower contained in this Security Instrument and the Note.

Borrower represents and warrants that Borrower is lawfully seized of the Mortgaged Property and has the right, power and authority to mortgage, grant, convey and assign the Mortgaged Property, and that the Mortgaged Property is unencumbered except for easements and restrictions listed in a schedule of exceptions to coverage in any title insurance policy issued to Lender contemporaneously with the execution and recordation of this Security Instrument and insuring Lender’s interest in the Mortgaged Property. Borrower covenants that Borrower shall warrant and defend generally such title to the Mortgaged Property against all claims and demands, subject to said easements and restrictions.

Covenants. Borrower and Lender covenant and agree as follows:

1. DEFINITIONS. The definition of any capitalized term or word used herein can be found in this Security Instrument, and if not found in this Security Instrument, then found in the Borrower’s Regulatory Agreement and/or in the Note. The following terms, when used in this

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Security Instrument (including when used in the above recitals), shall have the following meanings:

“ Accounts Receivable ” means all right, title and interest of Operator in and to the following, in each case arising from the operation of the Healthcare Facility located on the Mortgaged Property in the ordinary course of business: (a) all rights to payment of a monetary obligation, whether or not earned by performance, including, but not limited to, accounts receivable, health-care insurance receivables, Medicaid and Medicare receivables, Veterans Administration receivables, or other governmental receivables, private patient receivables, and HMO receivables, (b) payment intangibles, (c) guaranties, letter-of-credit rights and other supporting obligations relating to the property described in clauses (a) and (b); and (d) all of the proceeds of the property described in clauses (a), (b) and (c). Notwithstanding the foregoing, “Accounts Receivable” shall not include accounts arising from the sale of Operator’s equipment, inventory or other goods, other than accounts arising from the sale of Operator’s inventory in the ordinary course of Operator’s business.

“ Affiliate ” is defined in 24 C.F.R. 200.215, or any successor regulation.

“ Ancillary Agreement ” means any separate agreement between Borrower and Lender for the purpose of establishing escrows or replacement reserves for the Mortgaged Property, establishing an account to assure the completion of repairs or improvements specified in such agreement, or any other agreement or agreements between Borrower and Lender which provide for the establishment of any other fund, reserve or account including but not limited to those reserves and escrows required by HUD in connection with construction activity, if any, and those reserves and escrows required by HUD in connection with the Project. Such agreements may include, but are not limited to, any sinking fund agreement, which provides for a depreciation reimbursement account to pay future principal payments under the Note, where Medicaid or third-party reimbursement is on a depreciation plus interest basis; any depreciation reserve fund agreement which provides for an escrow or trust account with an approved custodian or trustee established for replacing equipment and for funding of depreciation in accordance with a schedule approved by HUD.

“ Approved Use ” means the use of the Project for the operation of the Healthcare Facility as a nursing home facility with 113 beds, of which not less than 113 beds are in use and such other uses as may be approved in writing from time to time by HUD based upon a request made by Borrower, Master Tenant, or Operator, but excluding any uses that are discontinued with the written approval of HUD.

“ Assisted Living Facility ” means a public facility, proprietary facility, or facility of a private nonprofit corporation or association that (1) is licensed and regulated by the State (or if there is no state law providing for such licensing and regulation by the State, by the municipality or other political subdivision) in which the facility is located; (2) makes available to residents supportive services to assist the residents in carrying out activities of daily living, and may make available to residents home healthcare services, such as nursing and therapy; and (3) provides separate dwelling

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units for residents, each of which may contain a full kitchen and bathroom, and which includes common rooms and other facilities appropriate for the provision of supportive service to the residents of the facility.

“ Board and Care Home ” means any residential facility providing room, board, and continuous protective oversight that is regulated by a State pursuant to the provisions of Section 1616(e) of the Social Security Act.

“ Borrower ” means all persons or entities identified as Borrower in the first paragraph of this Security Instrument, together with any successors, heirs, and assigns (jointly and severally). Borrower shall include any person or entity taking title to the Mortgaged Property whether or not such person or entity assumes the Note. Whenever the term “Borrower” is used herein, the same shall be deemed to include the obligor of the debt secured by this Security Instrument, and so long as the Note is insured or held by HUD, shall also be deemed to be the mortgagor as defined by Program Obligations.

“ Borrower-Operator Agreement ” means any agreement relating to the management and operation of the Healthcare Facility by and between Borrower Master Tenant and Operator, including any Operator Lease.

“ Borrower’s Regulatory Agreement ” means that certain Healthcare Regulatory Agreement - Borrower relating to the Project, and made by Borrower for the benefit of HUD.

“ Building Loan Agreement ” means the HUD-approved form of the agreement between Borrower and Lender setting forth the terms and conditions for a HUD-insured construction loan.

“ Business Day ” means any day other than a Saturday, a Sunday, a federal holiday or other day on which the federal government by law or executive order is closed, or a day on which banking institutions in the State are authorized or obligated by law or executive order to remain closed.

“ Contract of Insurance ” is defined in 24 C.F.R. Part 232.800(a).

“ Covenant Event of Default ” is defined in Section 22.

“ Event of Default ” means a Monetary Event of Default or a Covenant Event of Default, as each is defined in Section 22 and according to the provision of Section 22.

“ Fixtures ” means all property or goods that become so related or attached to the Land or the Improvements that an interest arises in them under real property law, whether acquired now or in the future, excluding all resident owned goods and property, and including but not limited to: major movable equipment, machinery, equipment (including medical equipment and systems), engines,

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boilers, incinerators, installed building materials; systems and equipment for the purpose of supplying or distributing heating, cooling, electricity, gas, water, air, or light; antennas, cable, wiring and conduits used in connection with radio, television, computers and computer software, medical systems, security, fire prevention, or fire detection or otherwise used to carry electronic signals; telephone systems and equipment; elevators and related machinery and equipment; fire detection, prevention and extinguishing systems and apparatus; security and access control systems and apparatus; plumbing systems; water heaters, ranges, stoves, microwave ovens, refrigerators, dishwashers, garbage disposals, washers, dryers and other appliances; light fixtures, awnings, storm windows and storm doors; pictures, screens, blinds, shades, curtains and curtain rods; mirrors; cabinets, paneling, rugs and floor and wall coverings; fences, trees and plants; swimming pools; playground and exercise equipment and classroom furnishings and equipment.

“ Governmental Authority ” means any board, commission, department or body of any municipal, county, state, tribal or federal governmental unit, including any United States territorial government, and any public or quasi-public authority, or any subdivision of any of them, that has or acquires jurisdiction over the Mortgaged Property, including the use, operation or improvement of the Mortgaged Property.

“ Healthcare Facility ” means that portion of the Project operated on the Land as a Nursing Home, Intermediate Care Facility, Board and Care Home, Assisted Living Facility and/or any other healthcare facility authorized to receive insured mortgage financing pursuant to Section 232 of the National Housing Act, as amended, including any commercial space included in the facility.

“ Healthcare Facility Working Capital ” means current assets of the Healthcare Facility minus current liabilities of the Healthcare Facility, pursuant to Generally Accepted Accounting Principles, as Program Obligations may further clarify or define.

“ HUD ” means the U.S. Department of Housing and Urban Development acting by and through the Secretary in the capacity as insurer or holder of the Loan under the authority of the National Housing Act, as amended, the Department of Housing and Urban Development Act, as amended, or any other federal law or regulation pertaining to the Loan or the Project.

“ Impositions ” is defined in Section 8.

“ Imposition Deposits ” is defined in Section 8.

“ Improvements ” means the buildings, structures, and alterations now constructed or at any time in the future constructed or placed upon the Land, including any future replacements and additions.

“ Indebtedness ” means the principal of, interest on, and all other amounts due at any time under the Note or the Loan Documents, including prepayment premiums, late charges, default interest,

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and advances to protect the security as provided in the Loan Documents.

“ Land ” means the estate in realty described in Exhibit A .

“ Leases ” means any and all Operator Leases, Master Leases, Residential Agreements, and any other present and future leases, subleases, licenses, concessions or grants or other possessory interests now or hereafter in force, whether oral or written, covering or affecting the Project, or any portion of the Project, and all modifications, extensions or renewals. Any ground lease to the Borrower creating a leasehold interest in the Land that is security for the Loan is not included in this definition.

“ Lender ” means the entity identified as “Lender” in the first paragraph of this Security Instrument, or any subsequent holder of the Note, and whenever the term “Lender” is used herein, the same shall be deemed to include the obligee, or the Trustee(s) and the beneficiary of this Security Instrument, and so long as the Loan is insured or held by HUD, shall also be deemed to be the mortgagee as defined by Program Obligations.

“ Lien ” is defined in Section 17.

“ Loan ” is defined in the opening paragraphs of this Security Instrument.

“ Loan Application ” is defined in Section 41.

“ Loan Documents ” means this Security Instrument, the Note, the Borrower’s Regulatory Agreement , the Master Tenant’s Regulatory Agreement, the Operator’s Regulatory Agreement, and all other agreements, instruments, and documents which are now existing or are in the future required by, delivered to, and/or assigned to Lender and/or HUD in connection with or related to the Loan, whether executed or delivered by or on behalf of Borrower or Operator or Master Tenant, as such documents may be amended from time to time, provided that the Borrower-Operator Agreement and the Master Lease, and any amendments thereto, shall not be considered Loan Documents.

“ Master Lease ” means that certain Master Lease Agreement, in which the Healthcare Facility is aggregated with other HUD-insured healthcare facilities and leased to the Master Tenant.

“ Master Tenant ” means 2014 HUD MASTER TENANT, LLC, a limited liability company organized and existing under the laws of Georgia, the master tenant pursuant to the Master Lease.

“ Master Tenant’s Regulatory Agreement ” means that certain Healthcare Regulatory Agreement - Master Tenant, relating to the Project and entered into by Master Tenant for the benefit of HUD.


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“ Monetary Event of Default ” is defined in Section 22.

“ Mortgaged Property ” means all of Borrower’s present and future right, title and interest in and to all of the following, whether now owned or held or later acquired:

(1)
the Land;

(2)
the Healthcare Facility;

(3)
the Improvements;

(4)
the Fixtures;

(5)
the Personalty;

(6)
all current and future rights, including air rights, development rights, zoning rights and other similar rights or interests, easements, tenements, rights-of-way, strips and gores of land, streets, alleys, roads, sewer rights, waters, watercourses, and appurtenances related to or benefiting the Land or the Improvements, or both, and all rights-of-way, streets, alleys and roads which may have been or may in the future be vacated;

(7)
all insurance policies covering any of the Mortgaged Property, and all proceeds paid or to be paid by any insurer of the Land, the Improvements, the Fixtures, the Personalty or any other part of the Mortgaged Property, whether or not Borrower obtained the insurance pursuant to Lender’s requirement;

(8)
all awards, payments and other compensation made or to be made by any Governmental Authority with respect to the Land, the Improvements, the Fixtures, the Personalty or any other part of the Mortgaged Property, including any awards or settlements resulting from condemnation proceedings or the total or partial taking of the Land, the Improvements, the Fixtures, the Personalty or any other part of the Mortgaged Property under the power of eminent domain or otherwise and including any conveyance in lieu thereof;

(9)
all contracts, options and other agreements for the sale of the Land, the Improvements, the Fixtures, the Personalty or any other part of the Mortgaged Property entered into by Borrower now or in the future, including cash or securities deposited to secure performance by parties of their obligations;

(10)
all proceeds (cash or non-cash), liquidated claims or other consideration from the conversion, voluntary or involuntary, of any of the Mortgaged Property and the right to collect such proceeds, liquidated claims or other consideration;


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(11)
all revenue generated by any portion of the Mortgaged Property and any Leases;

(12)
all earnings, royalties, instruments, accounts (including any deposit accounts), Accounts Receivable, supporting obligations, issues and profits from the Land, the Improvements, the Healthcare Facility, or any other part of the Mortgaged Property, and all undisbursed proceeds of the Loan;

(13)
all Imposition Deposits;

(14)
all refunds or rebates of Impositions by any Governmental Authority or insurance company (other than refunds applicable to periods before the real property tax year in which this Security Instrument is dated);

(15)
any security deposits under any Lease;

(16)
all names under or by which any of the above Mortgaged Property may be operated or known, and all trademarks, trade names, and goodwill relating to any of the Mortgaged Property;

(17)
all deposits and/or escrows held by or on behalf of Lender under Ancillary Agreements;

(18)
all awards, payments, settlements or other compensation resulting from litigation involving the Project;

(19)
any and all licenses, bed authority, and/or certificates of need required to operate the Healthcare Facility and receive the benefits and reimbursements under a provider agreement with Medicaid, Medicare, any State or local programs, healthcare insurers or other assistance providers relied upon by HUD to insure this Security Instrument, to the extent allowed by law, and regardless of whether such rights and contracts are held by Borrower or an operator; and

(20)
all receipts, revenues, income and other moneys received by or on behalf of the Healthcare Facility, including all Accounts Receivable, all contributions, donations, gifts, grants, bequests, all revenues derived from the operation of the Healthcare Facility and all rights to receive the same, whether in the form of Accounts Receivable, contract rights, chattel paper, instruments or other rights whether now owned or held or later acquired by or in connection with the operation of the Healthcare Facility.

“ Non-Profit Borrower ” means a Borrower that is treated under the firm commitment as a corporation or association organized for purposes other than profit or gain for itself or persons identified therewith, pursuant to Section 501(c)(3) or other applicable provisions of the Internal Revenue Code.


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“ Note ” means the Note executed by Borrower evidencing the Loan described in this Security Instrument, including all schedules, riders, allonges and addenda, as such Note may be amended from time to time.

“ Notice ” means all notices, demands and other communications under or concerning any of the Loan Documents.

“ Nursing Home ” means a public facility, proprietary facility, or facility of a private nonprofit corporation or association, licensed or regulated by the State (or, if there is no State law providing for such licensing and regulation by the State, by the municipality or other political subdivision in which the facility is located), for the accommodation of convalescents or other persons who are not acutely ill and not in need of hospital care but who require skilled nursing care and related medical services, in which such nursing care and medical services are prescribed by, or are performed under the general direction of, persons licensed to provide such care or services in accordance with the laws of the State where the facility is located.

“ Operator ” means, except as otherwise approved by HUD, (i) any single asset entity acceptable to HUD that operates the Healthcare Facility, pursuant to a lease, management agreement, operating agreement, or similar contract with the Borrower, or if the Healthcare Facility is aggregated with other health care facilities in connection with a master lease, with the Master Tenant, or (ii) the Borrower in those circumstances in which the Borrower is directly operating the Healthcare Facility. Where the Project has more than one licensed operator, the use of the singular shall include the plural.
 
“ Operator Lease ” means a lease by Borrower Master Tenant to Operator providing for the operation of the Healthcare Facility.

“ Operator’s Regulatory Agreement ” means that certain Healthcare Regulatory Agreement - Operator, relating to the Project and entered into by Operator for the benefit of HUD.

“ Operator’s Security Agreement ” means that certain Operator Security Agreement relating to the Project, and made by Operator.

“ Personalty ” means all equipment, inventory, and general intangibles associated with the Healthcare Facility and/or the Project. It includes furniture, furnishings, beds, machinery, building materials, appliances, goods, supplies, tools, books, records (whether in written or electronic form), computer equipment (hardware and software) and other tangible or electronically stored personal property (other than Fixtures) that are owned, leased or used now or in the future in connection with the ownership, management or operation of the Healthcare Facility and/or any other portion of the Project, or are located on the Land or in the Improvements, and any operating agreements relating

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to the Project, and any surveys, plans and specifications and contracts for architectural, engineering and construction services relating to the Project, and all other intangible property and rights relating to the operation of, or used in connection with, the Project, including all certifications, approvals and governmental permits relating to any activities on the Land. Personalty includes all tangible and intangible personal property used in connection with the Healthcare Facility (such as major movable equipment and systems), accounts, licenses, bed authorities, certificates of need required to operate the Healthcare Facility and to receive benefits and reimbursements under provider agreements with Medicaid, Medicare, State and local programs, payments from healthcare insurers and any other assistance providers; all certifications, permits and approvals, instruments, Rents, lease and contract rights, and equipment leases relating to the use, operation, maintenance, repair and improvement of the Healthcare Facility. Generally, intangibles shall also include all cash and cash escrow funds, such as but not limited to: reserve for replacement accounts, debt service reserve accounts, bank accounts, Residual Receipts accounts, and investments.

“ Principal ” is defined in 24 C.F.R. 200.215, or any successor regulation.

“ Program Obligations ” means (1) all applicable statutes and any regulations issued by HUD pursuant thereto that apply to the Project, including all amendments to such statutes and regulations, as they become effective, except that changes subject to notice and comment rulemaking shall become effective only upon completion of the rulemaking process, and (2) all current requirements in HUD handbooks and guides, notices, and mortgagee letters that apply to the Project, and all future updates, changes and amendments thereto, as they become effective, except that changes subject to notice and comment rulemaking shall become effective only upon completion of the rulemaking process, and provided that such future updates, changes and amendments shall be applicable to the Project only to the extent that they interpret, clarify and implement terms in this Security Instrument rather than add or delete provisions from such document. Handbooks, guides, notices, and mortgagee letters are available on HUD’s official website: http://www.hud.gov/offices/adm/hudclips/index.cfm, or a successor location to that site.

“ Project ” means any and all assets of whatever nature or wherever situated related to the Loan, including without limitation, the Mortgaged Property, any Improvements, and any collateral owned by the Operator securing the Loan.

“ Property Jurisdiction ” means any applicable jurisdiction in which the Land is located.

“ Reasonable Operating Expenses ” means expenses that arise from the operation, maintenance and routine repair of the Project, including all payments and deposits required under this Security Instrument and any Loan Document, and comply with the requirements of 24 C.F.R. 232.1007, or successor regulation.

“ Rent ” means all rent due pursuant to any Master Lease or Operator Lease, any payments due pursuant to any Residential Agreement, any other lease payments, revenues, charges, fees and assistance payments arising from the operation of the Project, including but not limited to, if and

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for so long as applicable, workers’ compensation, social security, Medicare, Medicaid, and other third-party reimbursement payments, Accounts Receivable and all payments and income arising from the operation of the Healthcare Facility and/or the provision of services to residents thereof.

“ Residential Agreement ” means any lease or other agreement between the Operator and a resident setting forth the terms of the resident’s living arrangements and the provision of any related services.

“ Residual Receipts ” means certain funds held by a Non-Profit Borrower which are restricted in their use by Program Obligations.

“ State ” means the state of the Property Jurisdiction and may include any of the fifty states of the United States of America, Puerto Rico, the District of Columbia, Guam, the Trust Territory of the Pacific Islands, the American Samoa, and the Virgin Islands.

“ Surplus Cash ” means any Borrower’s cash remaining in Project-related accounts at the close of business on the last day of the Project’s semi-annual fiscal period, as further described in Program Obligations.

“ Taxes ” means all taxes, assessments, vault rentals and other charges, if any, general, special or otherwise, including all assessments for schools, public betterments and general or local improvements, which are levied, assessed or imposed by any public authority or quasi-public authority, and which, if not paid, could become a lien on the Land or the Improvements.

“ Waste ” means a failure to keep the Project in decent, safe and sanitary condition and in good repair. Waste also means the failure to meet certain financial obligations regarding the payment of Taxes and the relinquishment of the possession of Rents. During any period in which HUD insures the Loan or holds a security interest on the Mortgaged Property, Waste is committed when, without Lender’s and HUD’s express written consent, Borrower:

(1)
physically changes, or permits changes to, the Mortgaged Property, whether negligently or intentionally, in a manner that reduces its value;

(2)
fails to maintain the Mortgaged Property in decent, safe, and sanitary condition and in good repair;

(3)
fails to pay, or cause to be paid, before delinquency any Taxes secured by a lien having priority over this Security Instrument;

(4)
materially fails to comply with covenants in the Note, this Security Instrument, Borrower’s Regulatory Agreement, or any Loan Document, respecting physical care, maintenance, construction, abandonment, demolition, or insurance against casualty of the Mortgaged Property; or


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(5)
retains possession of Rents to which Lender or its assigns have the right of possession under the terms of the Loan Documents.

“ UCC Collateral ” means any Mortgaged Property which, under applicable law, may be subject to a security interest under the UCC, whether acquired now or in the future, and all products and cash proceeds and non-cash proceeds thereof.

2. UNIFORM COMMERCIAL CODE SECURITY AGREEMENT.

(a) This Security Instrument is also a security agreement under the Uniform Commercial Code (“ UCC ”) for any of the Mortgaged Property which is UCC Collateral, and Borrower hereby grants to Lender a security interest in the UCC Collateral. Borrower hereby authorizes Lender to file financing statements, continuation statements and amendments, including any deposit account control agreements or similar agreements, in such form as Lender may require to perfect or continue the perfection of this security interest. Borrower agrees to enter into any agreements, in form as Lender may require, that the UCC requires to perfect and continue perfection of Lender’s security interest in the portion of UCC Collateral that requires Lender control to attain such perfection. Borrower shall pay all filing costs and all costs and expenses of any record searches for financing statements that Lender may require. Without the prior written consent of Lender and HUD, Borrower shall not create or permit to exist any other lien or security interest in any of the UCC Collateral. Borrower represents and warrants to Lender that, except for UCC filings disclosed to Lender and HUD that are to be released in connection with the closing of the Loan or otherwise consented to in writing by Lender and HUD, no UCC filings have been made against Borrower, the UCC Collateral, the Mortgaged Property, or the Project prior to the initial or initial/final endorsement of the Note by HUD, and Borrower has taken and shall take no action that would give rise to such UCC filings, except for any UCC filings in connection with the acquisition of any Personalty that has been approved in writing by HUD. Borrower also represents and warrants to Lender that, except in connection with any Accounts Receivable financing as approved by Lender and HUD or as otherwise permitted by Lender and HUD, Borrower has not entered into, and will not enter into, nor has it permitted nor will it permit, Operator or Master Tenant or any management agent, as applicable, to enter into any agreement with any party other than Lender in conjunction with the present Loan transaction that allows for the perfection of a security interest in any portion of the UCC Collateral. Borrower will promptly notify Lender of any change in its business or principal location, name, or other organizational change that would require a filing under the UCC to continue perfection of Lender’s interest, and hereby authorizes Lender to file, and will assist Lender in filing, any forms necessary to continue the effectiveness of existing financing statements or for perfection of Lender’s security interest. If an Event of Default has occurred and is continuing, Lender shall have the remedies of a secured party under the UCC, in addition to all remedies provided by this Security Instrument or existing under applicable law. In exercising any remedies, Lender may exercise its remedies against the UCC Collateral separately or together, and in any order, without in any way affecting the availability of Lender’s other remedies. This Security Instrument constitutes

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a fixture filing financing statement with respect to any part of the Mortgaged Property which is or may become a Fixture and which shall be filed in the local real estate records.

(b) In addition, to the extent the UCC Collateral may exclude any of the Mortgaged Property, Borrower hereby grants to Lender a security interest in any and all of the present or hereafter acquired Mortgaged Property, and all products, cash proceeds and non-cash proceeds thereof.

(c) The Borrower acknowledges and agrees that, in applying the law of any jurisdiction that at any time enacts all or substantially all of the uniform provisions of Revised Article 9 of the UCC (1999 Official Text, as amended), the definition of Mortgaged Property and the above collateral description covers all assets of Borrower.

3. CONTROL OF DEPOSIT ACCOUNTS. As part of the consideration for the Indebtedness, Borrower has executed, or has caused Operator or Master Tenant to execute, one or more deposit account control agreements or similar agreements in a form approved by Lender and HUD, pursuant to which Borrower, Master Tenant, or Operator, as applicable, acknowledges Lender as a secured party, and grants to Lender control (as defined in Section 9-104 of the UCC) of one or more deposit accounts of the Project and all cash, moneys and other property on deposit from time to time therein. Lender shall exercise such control in accordance with such deposit account control agreements or similar agreements, and Borrower shall continue to execute or cause to be executed such deposit account control agreements or similar agreements with respect to the Project’s accounts as required by Lender and HUD.

4. ASSIGNMENT OF LEASES; LEASES AFFECTING THE MORTGAGED PROPERTY.

(a) As part of the consideration for the Indebtedness, Borrower absolutely and unconditionally assigns and transfers to Lender all of Borrower’s rights, title and interest in, to and under the Leases, including Borrower’s right, power and authority to modify the terms of any such Lease, or extend or terminate any such Lease. It is the intention of Borrower to establish a present, absolute and irrevocable transfer and assignment to Lender of all of Borrower’s right, title and interest in, to and under the Leases. Borrower and Lender intend this assignment of the Leases to be immediately effective and to constitute an absolute present assignment and not an assignment for additional security only. For purposes of giving effect to this absolute assignment of the Leases, and for no other purpose, the Leases shall not be deemed to be a part of the Mortgaged Property. However, if this present, absolute and unconditional assignment of Leases is not enforceable by its terms under the laws of the Property Jurisdiction, then the Leases shall be included as a part of the Mortgaged Property and it is the intention of Borrower that in this circumstance this Security Instrument create and perfect a lien on the Leases in favor of Lender, which lien shall be effective as of the date of this Security Instrument.

(b) Until Lender gives Notice to Borrower of Lender’s exercise of its rights under this

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Section 4, Borrower shall have all rights, power and authority granted to Borrower under any Lease (except as otherwise limited by this Section or any other provision of this Security Instrument), including the right, power and authority to modify the terms of any Lease or extend or terminate any Lease as such rights are limited or affected by the terms of the Loan Documents and Program Obligations. Upon the occurrence of an Event of Default and throughout its continuation, the permission given to Borrower pursuant to the preceding sentence to exercise its rights, power and authority under Leases shall automatically terminate. Should such Event of Default be subsequently cured, the Borrower’s aforesaid permission shall be reinstated. Borrower shall comply with and observe Borrower’s obligations under all Leases, including Borrower’s obligations, if any, pertaining to the maintenance and disposition of security deposits.

(c) Borrower acknowledges and agrees that the exercise by Lender, either directly or by its designee, of any of the rights conferred under this Section 4 shall not be construed to make Lender a lender-in-possession of the Mortgaged Property so long as Lender, or an authorized agent of Lender, has not entered into actual possession of the Land and the Improvements. The acceptance by Lender of the assignment of the Leases pursuant to Section 4(a) shall not at any time or in any event obligate Lender to take any action under this Security Instrument or to expend any money or to incur any expenses. Lender shall not be liable in any way for any injury or damage to person or property sustained by any person or persons, firm or corporation in or about the Mortgaged Property unless Lender is a lender-in-possession. Prior to Lender’s actual entry into and taking possession of the Mortgaged Property, Lender shall not (1) be obligated to perform any of the terms, covenants and conditions contained in any Lease (or otherwise have any obligation with respect to any Lease); (2) be obligated to appear in or defend any action or proceeding relating to the Lease or the Mortgaged Property; or (3) be responsible for the operation, control, care, management or repair of the Mortgaged Property or any portion of the Mortgaged Property. The execution of this Security Instrument by Borrower shall constitute conclusive evidence that all responsibility for the operation, control, care, management and repair of the Mortgaged Property is and shall be that of Borrower, prior to such actual entry and taking of possession.

(d) Upon delivery of Notice by Lender to Borrower of Lender’s exercise of Lender’s rights under this Section 4 at any time after the occurrence of an Event of Default, and without the necessity of Lender entering upon and taking and maintaining control of the Mortgaged Property directly, by a receiver, or by any other manner or proceeding permitted by the laws of the Property Jurisdiction, Lender immediately shall have all rights, powers and authority granted to Borrower under any Lease, including the right, power and authority to modify the terms of any such Lease, or extend or terminate any such Lease.

(e) Borrower shall not receive or accept, nor permit Operator to receive or accept, Rent under any Lease (whether residential or non-residential) for more than two months in advance.


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5. PAYMENT OF INDEBTEDNESS; PERFORMANCE UNDER THE LOAN DOCUMENTS; PREPAYMENT PREMIUM. Borrower shall pay the Indebtedness when due in accordance with the terms of the Note and this Security Instrument and shall perform, observe and comply with all other provisions of the Note and this Security Instrument. Borrower shall pay a prepayment premium in connection with certain prepayments of the Indebtedness, including a payment made after Lender’s exercise of any right of acceleration of the Indebtedness, as provided in the Note.

6. EXCULPATION. Except for personal liability expressly provided for in this Security Instrument or in the Note or in the Borrower’s Regulatory Agreement, the execution of the Note shall impose no personal liability upon Borrower and ADCARE HEALTH SYSTEMS, INC., a Georgia corporation, or for payment of the Indebtedness evidenced thereby and in the Event of Default, the holder of the Note shall look solely to the Mortgaged Property in satisfaction of the Indebtedness and will not seek or obtain any deficiency or personal judgment against Borrower and ADCARE HEALTH SYSTEMS, INC., a Georgia corporation, except such judgment or decree as may be necessary to foreclose or bar its interest in the Mortgaged Property and all other property mortgaged, pledged, conveyed or assigned to secure payment of the Indebtedness; provided, that nothing in this Section 6 of this Security Instrument and no action so taken shall operate to impair any obligation of Borrower under the Borrower’s Regulatory Agreement.

7. DEPOSITS FOR TAXES, INSURANCE AND OTHER CHARGES.

(a) Borrower shall pay to and deposit with Lender, or shall cause Operator to pay or deposit with Lender, together with and in addition to the monthly payments of interest or of principal and interest payable under the terms of the Note on the first day of each month after the commencement of amortization under the Note, and continuing until the debt secured hereby is paid in full, the following sums:

(1)
an amount sufficient to provide Lender with funds to pay the next mortgage insurance premium if this Security Instrument and the Note are insured by HUD, or a monthly service charge, if they are held by HUD, as follows:

(i)
If and so long as the Note is insured under the provisions of the National Housing Act, as amended, an amount sufficient to accumulate in the hands of Lender one month prior to its due date the annual mortgage insurance premium; or

(ii)
If and so long as the Note and this Security Instrument are held by HUD, a monthly service charge in an amount equal to the lesser of the amount permitted by law the amount set forth in Program Obligations, o computed for each successive year beginning with the

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first day of the month following the date of this Security Instrument, or the first day of the month following assignment, if the Note and this Security Instrument are assigned to HUD without taking into account delinquencies or prepayment; and

(2)
a sum equal to the ground rents, if any, next due, plus the premiums that will next become due and payable on policies of fire and other property insurance covering the premises covered hereby, plus water rates, Taxes, municipal/government utility charges and special assessments next due on the premises covered hereby (all as estimated by Lender) less all sums already paid therefore divided by the number of months to the date when such ground rents, premiums, water rates, Taxes, municipal/utility charges and special assessments will become delinquent, such sums to be held by Lender in trust to pay said ground rents, premiums, water rates, Taxes, and special assessments;

(3)
provided that, all payments and deposits mentioned in the two preceding subsections of this Section and all payments to be made under the Note shall be added together and the aggregate amount thereof shall be paid each month in a single payment or deposit to be applied by Lender to the following items in the order set forth:

(i)
mortgage insurance premium charges under the Contract of Insurance;

(ii)
ground rents, if Lender has required them to be escrowed with Lender, Taxes, special assessments, water rates, municipal/government utility charges, fire and other property insurance premiums;

(iii)
interest on the Note; and

(iv)
amortization of the principal of the Note.

(b) Borrower shall pay to and deposit, or shall cause Operator to pay or deposit, with Lender all other escrows and deposits, including any reserves for replacements.

(c) Borrower shall deposit with Lender any other amounts as may be required by any Ancillary Agreement and shall perform all other obligations of Borrower under each Ancillary Agreement. Ancillary Agreement deposits shall be held in an institution (which may be Lender, if Lender is such an institution) whose deposits or accounts are insured or guaranteed by a federal agency and in accordance with Program Obligations.

8. IMPOSITION DEPOSITS.

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(a) In the event Borrower or Operator fails to pay any sums provided for in this Security Instrument, Lender, at its option, may pay the same. Any excess funds accumulated under Section 7(a) remaining after payment of the items therein mentioned, shall be credited to subsequent monthly payments of the same nature required thereunder; but if any such item shall exceed the estimate therefore, or if Borrower or Operator shall fail to pay any other governmental or municipal charge, Borrower shall forthwith, or shall cause Operator to forthwith, make good the deficiency or pay the charge before the same become delinquent or subject to interest or penalties and in default thereof Lender may pay the same. All sums paid or advanced by Lender and any sums which Lender may be required to advance to pay mortgage insurance premiums shall be added to the Indebtedness and shall bear interest from the date of payment at the rate specified in the Note and shall be due and payable on demand. In case of termination of the Contract of Insurance by prepayment of the Indebtedness in full or otherwise (except as hereinafter provided), accumulations under Section 7(a) not required to pay sums due under Section 7(a)(3) shall be credited to Borrower. If the Mortgaged Property is sold under foreclosure or is otherwise acquired by Lender after an Event of Default, any remaining balance of the accumulations under Section 7(a) shall be credited to the principal under the Note as of the date of the commencement of foreclosure proceedings or as of the date the Mortgaged Property is otherwise acquired; and accumulations under Section 7 shall be likewise credited unless required to pay sums due HUD under Section 7(a)(3). The amounts deposited under Section 7 and Section 8 are collectively referred to in this Security Instrument as the “ Imposition Deposits ”. The obligations of Borrower for which the Imposition Deposits are required are collectively referred to in this Security Instrument as “ Impositions ”. The amount of the Imposition Deposits shall be sufficient to enable Lender to pay applicable Impositions before the last date upon which such payment may be made without any penalty or interest charge being added. Lender shall maintain records indicating how much of the monthly Imposition Deposits and how much of the aggregate Imposition Deposits held by Lender are held for the purpose of paying Taxes, insurance premiums and each other obligation of Borrower for which Imposition Deposits are required. Any waiver by Lender of the requirement that Borrower remit Imposition Deposits to Lender may be revoked by Lender, in Lender’s discretion, at any time upon Notice to Borrower.

(b) Imposition Deposits shall be held in accounts insured or guaranteed by a federal agency and in accordance with Program Obligations. Lender shall apply the Imposition Deposits to pay Impositions so long as no Event of Default has occurred and is continuing. Unless required by Program Obligations, Lender shall not be required to pay Borrower any interest, earnings or profits on the Imposition Deposits with the exception of the reserve for replacements account or Residual Receipts account (if any). Borrower hereby pledges and grants to Lender a security interest in the Imposition Deposits as additional security for all of Borrower’s obligations under this Security Instrument and the Note. Any amounts deposited with Lender under Section 7 shall not be trust funds, nor shall they operate to reduce the Indebtedness.

(c) If Lender receives a bill or invoice for an Imposition, Lender shall pay the Imposition

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from the Imposition Deposits held by Lender. Lender shall have no obligation to pay any Imposition to the extent it exceeds Imposition Deposits then held by Lender. Lender may pay an Imposition according to any bill, statement or estimate from the appropriate public office or insurance company without inquiring into the accuracy of the bill, statement or estimate or into the validity of the Imposition.

(d) If at any time the amount of the Imposition Deposits held by Lender (other than the reserves for replacements or Residual Receipts, if any) for payment of a specific Imposition exceeds the amount reasonably deemed necessary by Lender plus one-sixth of such estimate, the excess shall be credited against future installments of Imposition Deposits. If at any time the amount of the Imposition Deposits held by Lender for payment of a specific Imposition is less than the amount reasonably estimated by Lender to be necessary plus one-sixth of such estimate, Borrower shall pay to Lender the amount of the deficiency within fifteen (15) days after Notice from Lender.

9. REGULATORY AGREEMENT.

(a) Borrower and HUD have executed the Borrower’s Regulatory Agreement, which is incorporated in and made a part of this Security Instrument. In addition, and without limiting the generality of the foregoing, Borrower will deliver to Lender copies of all reports, financial statements and other information which the Borrower is obligated to provide to HUD pursuant to the Borrower’s Regulatory Agreement or otherwise pursuant to the Loan Documents or Program Obligations, not later than the earlier of (i) the date such reports, financial statements or other information are required to be delivered to HUD or (ii) ten (10) days after the Lender or HUD make a request for a report, financial statement or other information. Upon an Event of Default under the Borrower’s Regulatory Agreement and upon the request of HUD, Lender, at its option, may declare an Event of Default of this Security Instrument.

(b) Borrower shall require Operator to comply with the terms of the Operator’s Regulatory Agreement and shall set forth such requirements, or cause such requirements to be set forth, in any Borrower-Operator Agreement. Borrower shall require Master Tenant to comply with the terms of the Master Tenant’s Regulatory Agreement and shall set forth such requirements in any Master Lease.

10. APPLICATION OF PAYMENTS. If at any time Lender receives, from Borrower or otherwise, any amount applicable to the Indebtedness which is less than all amounts due and payable at such time, Lender must apply that payment to amounts then due and payable in the manner and in the order set forth in Section 7(a)(3). Neither Lender’s acceptance of an amount that is less than all amounts then due and payable nor Lender’s application of such payment in the manner authorized shall constitute or be deemed to constitute either a waiver of the unpaid amounts or an accord and satisfaction. Notwithstanding the application of any such amount to the Indebtedness, Borrower’s obligations under this Security Instrument and the Note shall remain unchanged.


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11. COMPLIANCE WITH LAWS. Borrower shall comply with all applicable: laws; ordinances; regulations; requirements of any Governmental Authority; lawful covenants and agreements recorded against the Mortgaged Property; so long as the Loan is insured or held by HUD, the Borrower’s Regulatory Agreement, and Program Obligations including lead-based paint maintenance requirements of 24 C.F.R. Part 35, subpart G, and any successor regulations; including but not limited to those of the foregoing pertaining to: health and safety; construction of Improvements on the Mortgaged Property; fair housing; civil rights; zoning and land use; Leases; and maintenance and disposition of security deposits; and, with respect to all of the foregoing, all subsequent amendments, revisions, promulgations or enactments. Borrower shall at all times maintain records sufficient to demonstrate compliance with the provisions of this Section 11. Borrower shall take appropriate measures to prevent, and shall not engage in or knowingly permit, any illegal activities at the Mortgaged Property, including those that could endanger residents or visitors, result in damage to the Mortgaged Property, result in forfeiture of the Mortgaged Property, or otherwise impair the lien created by this Security Instrument or Lender’s interest in the Mortgaged Property. Borrower represents and warrants to Lender that no portion of the Mortgaged Property has been or will be purchased with the proceeds of any illegal activity.

12. USE OF PROPERTY. Unless permitted by applicable law and approved by Lender, Borrower shall not (a) allow changes in the use for which all or any part of the Mortgaged Property is being used at the time this Security Instrument was executed, (b) convert any individual dwelling units or common areas to commercial use, (c) initiate or acquiesce in a change in the zoning classification of the Mortgaged Property that results in any change in permitted use that was in effect at the time of initial/final endorsement, (d) establish any condominium or cooperative regime with respect to the Mortgaged Property, (e) materially change any unit configurations or change the number of units in the Mortgaged Property, (f) combine all or any part of the Mortgaged Property with all or any part of a tax parcel which is not part of the Mortgaged Property, (g) subdivide or otherwise split any tax parcel constituting all or any part of the Mortgaged Property, or (h) so long as the Note is insured or held by HUD, permit the Mortgaged Property to be used as transient housing or as a hotel in violation of Section 513 of the National Housing Act, as amended.

13. PROTECTION OF LENDER’S SECURITY.

(a) If Borrower fails to perform any of its obligations under this Security Instrument, Note or Borrower’s Regulatory Agreement, or if any action or proceeding is commenced which purports to affect the Mortgaged Property, Lender’s security or Lender’s rights under this Security Instrument, including eminent domain, insolvency, Waste, code enforcement, civil or criminal forfeiture, enforcement of Hazardous Materials Laws, fraudulent conveyance or reorganizations or proceedings involving a bankrupt or decedent, then Lender at Lender’s option may make such appearances, advance such sums and take such actions as Lender reasonably deems necessary to perform such obligations of Borrower and to protect Lender’s interest, including (1) payment of

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fees and out-of-pocket expenses of attorneys (including fees for litigation at all levels), accountants, inspectors and consultants, (2) entry upon the Mortgaged Property to make repairs or secure the Mortgaged Property, (3) procurement of the insurance required by Section 19, and (4) payment of amounts which Borrower has failed to pay under Section 16 or any other Section of this Security Instrument.

(b) Any amounts advanced by Lender for taxes, special assessments, water rates, which are liens prior to this Security Instrument, insuring the Project and mortgage insurance premiums, paid after an Event of Default, shall be added to, and become part of the Indebtedness, and shall be immediately due and payable and shall bear interest from the date of the advance until paid at the interest rate specified in the Note. So long as the Loan is insured or held by HUD, Lender does not have any obligation to make advances except as required under Program Obligations, and any advance by Lender other than as required by Program Obligations requires prior HUD approval before such advance can be added to the Indebtedness.

(c) Nothing in Section 13 shall require Lender to incur any expense or take any action to protect its security.

14. INSPECTION. Upon reasonable notice, Lender and/or HUD, and/or the agents, representatives, and designees of either, may make or cause to be made entries upon and inspections of the Mortgaged Property (including any environmental inspections and tests) during normal business hours, or at any other reasonable time.

15. BOOKS AND RECORDS; FINANCIAL REPORTING. Borrower shall comply with the books, records, and reporting requirements of the Borrower’s Regulatory Agreement.

16. TAXES; OPERATING EXPENSES.

(a) Subject to the provisions of Section 16(c) and Section 16(d), Borrower shall pay, or cause to be paid, all Taxes when due and before the addition of any interest, fine, penalty or cost for nonpayment.

(b) Subject to the provisions of Section 16(c), Borrower shall pay, or cause to be paid, the expenses of operating, managing, maintaining and repairing the Mortgaged Property (including insurance premiums, utilities, repairs and replacements) before the last date upon which each such payment may be made without any penalty or interest charge being added.

(c) As long as no Event of Default exists and Borrower has timely delivered to Lender any bills or premium notice that it has received, Borrower shall not be obligated to pay Taxes, insurance premiums or any other individual Imposition to the extent that sufficient Imposition

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Deposits are held by Lender for the purpose of paying that specific Imposition. If an Event of Default exists, Lender may exercise any rights Lender may have with respect to Imposition Deposits without regard to whether Impositions are then due and payable; provided that so long as the Loan is insured by HUD, Lender’s exercise of its rights shall be subject to Program Obligations pertaining to claims for mortgage insurance benefits. Lender shall have no liability to Borrower for failing to pay any Impositions to the extent that any Event of Default has occurred and is continuing, insufficient Imposition Deposits are held by Lender at the time an Imposition becomes due and payable or Borrower has failed to provide Lender with bills and premium notice as provided above.

(d) Borrower, at its own expense, and, so long as the Loan is insured or held by HUD, in accordance with the Borrower’s Regulatory Agreement, may contest by appropriate legal proceedings, conducted diligently and in good faith, the amount or validity of any Imposition other than insurance premiums, if (1) Borrower notifies Lender of the commencement or expected commencement of such proceedings, (2) the Mortgaged Property is not in danger of being sold or forfeited, (3) Borrower deposits, or causes Operator to deposit, with Lender reserves sufficient to pay the contested Imposition, if requested by Lender, and (4) Borrower furnishes whatever additional security is required in the proceedings or is reasonably requested by Lender, which may include the delivery to Lender of the reserves established by Borrower to pay the contested Imposition.

(e) Borrower shall promptly deliver to Lender a copy of all Notices of, and invoices for, Impositions, and if Borrower pays any Imposition directly, Borrower shall promptly furnish to Lender receipts evidencing such payments.

17. LIENS; ENCUMBRANCES.

(a) Borrower shall not permit the grant, creation or existence of any mortgage, deed of trust, deed to secure debt, security deed, security interest or other lien or encumbrance (“ Lien ”) on the Mortgaged Property (other than the lien of this Security Instrument, any tax liens which are imposed before payment is due, or any subordinate liens which are approved by HUD and Lender), whether voluntary, involuntary or by operation of law, and whether or not such Lien has priority over the lien of this Security Instrument.

(b) Borrower shall not repay any HUD-approved subordinate Lien from proceeds of the Loan other than from Surplus Cash or Residual Receipts (as both terms are defined in the Borrower’s Regulatory Agreement), except in the case of a subordinate Lien created in connection with an operating loss loan insured pursuant to Section 223(d) of the National Housing Act or a supplement loan insured pursuant to Section 241 of the National Housing Act.

18. PRESERVATION, MANAGEMENT AND MAINTENANCE OF THE MORTGAGED PROPERTY. Borrower (a) shall not commit Waste, (b) shall not abandon the Mortgaged Property, (c) shall restore or repair promptly, in a good and workmanlike manner, any damaged part of the Mortgaged Property to the equivalent of its original condition, or such other

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condition as Lender may approve in writing, whether or not litigation or insurance proceeds or condemnation awards are available to cover any costs of such restoration or repair, (d) shall keep the Mortgaged Property in decent, safe, and sanitary condition and good repair, including the replacement of Personalty and Fixtures with items of equal or better function and quality, all in accordance with Program Obligations, (e) shall provide for qualified management of the Mortgaged Property by a licensed or otherwise qualified entity consistent with Program Obligations and/or any governmental requirements pertaining to operation and licensure, (f) shall give Notice to Lender of and, unless otherwise directed in writing by Lender, shall appear in and defend, any action or proceeding that could impair the Mortgaged Property, Lender’s security or Lender’s rights under this Security Instrument, (g) shall not (and shall not permit any Operator, resident or other person to) remove, demolish or alter the Mortgaged Property or any part of the Mortgaged Property except that Borrower may dispose of obsolete or deteriorated Fixtures or Personalty if the same are replaced with like items of the same or greater quality or value, or make minor alterations which do not impair the Mortgaged Property, and (h) so long as the Loan is insured or held by HUD, shall not expend any Project funds except for Reasonable Operating Expenses and necessary repairs and except as permitted by Program Obligations and the Borrower’s Regulatory Agreement, without the prior written approval of HUD. Borrower shall cause any operator, master tenant, management agent, as applicable, to comply with the foregoing provisions (a) through (h). So long as the Loan is insured or held by HUD, all expenses incurred by Borrower in connection with the Mortgaged Property shall be incurred in compliance with Program Obligations.

19. PROPERTY AND LIABILITY INSURANCE.

(a) Borrower shall keep the Mortgaged Property insured at all times to the full extent of Program Obligations, as they may be amended from time to time. Further, Borrower shall keep the Mortgaged Property insured at all times against such hazards as Lender may from time to time require, which insurance shall include but not be limited to coverage against loss by fire and allied perils, general boiler and machinery coverage, builders all-risk and business income coverage. Lender’s insurance requirements may change from time to time throughout the term of the Indebtedness. If Lender so requires, such insurance shall also include sinkhole insurance, mine subsidence insurance, earthquake insurance, and, if the Mortgaged Property does not conform to applicable zoning or land use laws, building ordinance or law coverage. If any of the Improvements are located in an area identified by the Federal Emergency Management Agency (or any successor to that agency) as an area having special flood hazards, Borrower shall maintain flood insurance covering the applicable Improvements in an amount at least equal to its development or project cost (less estimated land cost) or to the maximum limit of coverage made available with respect to the particular type of property under the National Flood Insurance Act of 1968, as amended, or its successor statute, whichever is less, provided that the amount of flood insurance need not exceed the outstanding principal balance of the Note, and flood insurance need not be maintained beyond the term of the Note. If Lender determines that flood insurance has not been obtained in the required amount, Lender must notify Borrower of Borrower’s obligations to obtain the proper flood insurance. If Borrower does not obtain such insurance within forty-five (45) days of the date of this notification, Lender shall purchase such flood insurance on behalf of Borrower and may charge Borrower for

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the cost of premiums and fees incurred by Lender in purchasing the flood insurance.

(b) All premiums on insurance policies required under Section 19(a) shall be paid in the manner provided in Section 7, unless Lender has designated in writing another method of payment. All such policies shall also be in a form approved by Lender. All policies of property damage insurance shall include a non-contributing, non-reporting mortgage clause in a form approved by Lender, and in favor of Lender (and HUD, as their interests appear) and shall name as loss payee Lender, its successors and assigns. Lender shall have the right to hold the original policies or duplicate original policies of all insurance required by Section 19(a). Borrower shall promptly deliver to Lender a copy of all renewal and other notices received by Borrower with respect to the policies and all receipts for paid premiums. At least thirty (30) days prior to the expiration date of a policy, Borrower shall deliver to Lender evidence of continuing coverage in form satisfactory to Lender.

(c) Borrower shall maintain, or shall cause Operator to maintain, at all times commercial general and professional liability insurance, workers’ compensation insurance and such other liability, errors and omissions and fidelity insurance coverages to the full extent of Program Obligations, as may be amended from time to time. Further, Borrower shall maintain, or shall cause Operator to maintain, at all times such coverages as Lender may from time to time require, or shall require any appropriate party to maintain at all times commercial general liability insurance, workers’ compensation insurance and such other liability, errors and omissions and fidelity insurance coverages as Lender may from time to time require or such other insurance coverage as required by Program Obligations.

(d) All insurance policies and renewals of insurance policies required by this Section 19 shall be in such amounts and for such periods as Lender may from time to time require, and shall be issued by insurance companies satisfactory to Lender and in accordance with Program Obligations. Lender shall have the right to effect insurance in the event Borrower fails to comply with this Section.

(e) Borrower shall comply with all insurance requirements and shall not permit any condition to exist on the Mortgaged Property that would invalidate any part of any insurance coverage that this Security Instrument requires Borrower to maintain.

(f) In the event of loss, Borrower shall give immediate written Notice to the insurance carrier and to Lender. Borrower hereby authorizes and appoints Lender as attorney-in-fact for Borrower to make proof of loss, to adjust and compromise any claims under policies of property damage insurance, to appear in and prosecute any action arising from such property damage insurance policies, to collect and receive the proceeds of property damage insurance, and to deduct from such proceeds Lender’s expenses incurred in the collection of such proceeds. This power of attorney is coupled with an interest and therefore is irrevocable. Borrower shall notify Lender of any payment received from any insurer. Lender shall (1) hold the balance of such proceeds to be

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used to reimburse Borrower for the cost of restoring and repairing the Mortgaged Property to the equivalent of its original condition or to a condition approved by Lender, or (2) apply the balance of such proceeds to the payment of the Indebtedness, whether or not then due. To the extent Lender determines to apply insurance proceeds to restoration, Lender shall do so in accordance with Lender’s then-current policies relating to the restoration of casualty damage on similar healthcare properties; provided that so long as the Loan is insured or held by HUD, insurance proceeds shall be applied as approved by HUD and in accordance with Program Obligations pursuant to Section 19(g) below.

(g) Lender shall not exercise its option to apply insurance proceeds to the payment of the Indebtedness if all of the following conditions are met: (1) no Event of Default (or any event which, with the giving of Notice or the passage of time, or both, would constitute an Event of Default) has occurred and is continuing; (2) Lender determines, in its discretion, that there will be sufficient funds to complete the restoration; (3) Lender determines, in its discretion, that the rental income from the Mortgaged Property after completion of the restoration will be sufficient to meet all operating costs and other expenses, Imposition Deposits, deposits to reserves and loan repayment obligations relating to the Mortgaged Property; and (4) Lender determines, in its discretion, that the restoration will be completed before the earlier of (A) one year before the maturity date of the Note or (B) one year after the date of the loss or casualty. Further, so long as the Loan is insured by HUD, Lender may not exercise its option to apply insurance proceeds to the payment of the Indebtedness without the prior written approval of HUD. If HUD fails to give its approval to the use or application of such funds within sixty (60) days after the written request by Lender, Lender may use or apply such funds for any of the purposes specified herein without the approval of HUD.

(h) If the Mortgaged Property is sold at a foreclosure sale or Lender or HUD acquire title to the Mortgaged Property, Lender and HUD, as applicable, shall automatically succeed to all rights of Borrower in and to any insurance policies and unearned insurance premiums and in and to the proceeds of property damage insurance resulting from any damage to the Mortgaged Property prior to such sale or acquisition.

20. CONDEMNATION.

(a) Borrower shall promptly notify Lender of any action or proceeding relating to any condemnation or other taking, or conveyance in lieu thereof, of all or any part of the Mortgaged Property, whether direct or indirect condemnation. Borrower shall appear in and prosecute or defend any action or proceeding relating to any condemnation unless otherwise directed by Lender in writing. Borrower authorizes and appoints Lender as attorney-in-fact for Borrower to commence, appear in and prosecute, in Lender’s or Borrower’s name, any action or proceeding relating to any condemnation and to settle or compromise any claim in connection with any condemnation. This power of attorney is coupled with an interest and therefore is irrevocable. However, nothing contained in this Section 20 shall require Lender to incur any expense or take any action. Borrower hereby transfers and assigns to Lender all right, title and interest of Borrower in and to any award

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or payment with respect to (1) any condemnation, or any conveyance in lieu of condemnation, and (2) any damage to the Mortgaged Property caused by governmental action that does not result in a condemnation.

(b) All awards of compensation in connection with condemnation for public use of or a taking of any of the Mortgaged Property shall be paid to Lender to be applied (1) to fees, costs and expenses (including reasonable attorney’s fees) incurred by Lender; and (2) to the amount due under the Note secured hereby in (i) amounts equal to the next maturing installment or installments of principal and (ii) with any balance to be credited to the next payment due under the Note. After payment to Lender of all fees, costs and expenses (including reasonable attorney’s fees) incurred by Lender under this Section 20, all awards of damages in connection with any condemnation for public use of or damage to the Mortgaged Property, shall be paid to Lender to be applied to an account held for and on behalf of Borrower, which account shall, at the option of Lender, either be applied to the amount due under the Note as specified in the preceding sentence, or be disbursed for the restoration. No amount applied to the reduction of the principal amount due in accordance with this Section 20(b) shall be considered an optional prepayment as the term is used in this Security Instrument and the Note secured hereby, nor relieve Borrower from making regular monthly payments commencing on the first day of the first month following the date of receipt of the award. Lender is hereby authorized in the name of Borrower to execute and deliver necessary releases or approvals or to appeal from such awards.

21. TRANSFERS OF THE MORTGAGED PROPERTY OR INTERESTS IN BORROWER.

(a) So long as the Loan is insured or held by HUD, unless permitted by Program Obligations, Borrower shall not convey, assign, transfer, pledge, hypothecate, encumber or otherwise dispose of the Mortgaged Property or any interest therein or permit the conveyance, assignment or transfer of any interest in Borrower (if the effect of such conveyance, assignment or transfer is the creation or elimination of a Principal) unless permitted by Program Obligations. Borrower need not obtain the prior written approval of HUD for: (i) conveyance of the Mortgaged Property at a judicial or non-judicial foreclosure sale under this Security Instrument; (ii) inclusion of Mortgaged Property in a bankruptcy estate by operation of law under the United States Bankruptcy Code; (iii) acquisition of an interest by inheritance or by court decree, or (iv) other transfers permitted by Program Obligations.

(b) If the Loan is no longer insured or held by HUD, Borrower shall not convey, assign, transfer, pledge, hypothecate, encumber or otherwise dispose of the Mortgaged Property or any interest therein or permit the conveyance, assignment or transfer of any interest in Borrower without the prior written approval of Lender in its sole discretion.


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22. EVENTS OF DEFAULT. The occurrence of any one or more of the following shall constitute either a “ Monetary Event of Default ” or a “ Covenant Event of Default ” under this Security Instrument:

(a) Monetary Event of Default: Any failure by Borrower to pay or deposit when due any amount required by the Note or Section 7(a) or (b) of this Security Instrument.

(b) Covenant Events of Default shall include:

(1)
fraud or material misrepresentation or material omission by Borrower, any of its officers, directors, trustees, general partners, members, managers or any guarantor in connection with (i) the Loan Application for or creation of the Indebtedness, (ii) any financial statements, or other report or information provided to Lender or any governmental entity during the term of the Indebtedness, or (iii) any request for Lender’s consent to any proposed action under this Security Instrument or the Note;

(2)
the commencement of a forfeiture action or proceeding, whether civil or criminal, which, in Lender’s reasonable judgment, could result in a forfeiture of the Mortgaged Property or otherwise materially impair the lien created by this Security Instrument or Lender’s interest in the Mortgaged Property;

(3)
any material failure by Borrower to perform or comply with any of its obligations under this Security Instrument (other than those otherwise specified in this Section 22), as and when required, which continues for a period of thirty (30) calendar days after Notice of such failure by Lender to Borrower, Lender shall extend such 30-day period by such time as Lender reasonably determines is necessary to correct the failure for so long as Lender determines, in its discretion, that: (i) Borrower is timely satisfying all payment obligations in the Loan Documents; (ii) none of the Permits and Approvals is at substantial and imminent risk of being terminated; (iii) such failure cannot reasonably be corrected during such 30-day period, but can reasonably be corrected in a timely manner, and (iv) Borrower commences to correct such failure, or cause such correction to be commenced, during such 30-day period and thereafter diligently and continuously proceeds to correct, or cause correction of, such failure. However, no such Notice shall apply in the case of any such material failure which could, in Lender’s judgment, absent immediate exercise by Lender of a right or remedy under this Security Instrument, result in harm to Lender or impairment of the Note or this Security Instrument;

(4)
so long as the Loan is insured or held by HUD, any failure by Borrower to

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perform any of its obligations as and when required under the Borrower’s Regulatory Agreement, which failure continues beyond the applicable cure period, if any, specified in the Borrower’s Regulatory Agreement; however, violations under the terms of the Borrower’s Regulatory Agreement may only be treated as a default under this Security Instrument if HUD requests Lender to treat them as such; and,

(5)
so long as the Loan is insured or held by HUD, any Event of Default pursuant to the Operator’s Regulatory Agreement, provided that such Event of Default pursuant to the Operator’s Regulatory Agreement may only be treated as a default under this Security Instrument if HUD requests Lender to treat it as such.

(c) Lender shall deliver to the Principal(s) of Borrower, Notice, as provided in Section 31, within five (5) Business Days in each case where Lender has delivered Notice to Borrower of an Event of Default, in order to provide the Principal(s) an opportunity to cure either a Monetary Event of Default or a Covenant Event of Default.

23. REMEDIES CUMULATIVE. Each right and remedy provided in this Security Instrument is distinct from all other rights or remedies under this Security Instrument, the Note, or so long as the Loan is insured or held by HUD, HUD’s remedies under the Borrower’s Regulatory Agreement or afforded by applicable law, and each shall be cumulative and may be exercised concurrently, independently, or successively, in any order.

24. FORBEARANCE.

(a) So long as the Loan is insured by HUD, Lender shall not without obtaining the prior written consent of HUD, take any of the following actions: extend the time for payment of all or any part of the Indebtedness; reduce the payments due under this Security Instrument or the Note; release anyone liable for the payment of any amounts under this Security Instrument or the Note; accept a renewal of the Note; modify the terms and time of payment of the Indebtedness; join in any extension or subordination agreement; release any Mortgaged Property; take or release other or additional security; modify the rate of interest or period of amortization of the Note or change the amount of the monthly installments payable under the Note; and otherwise modify this Security Instrument or the Note. However, if the Contract of Insurance has been terminated, Lender may (but shall not be obligated to) agree with Borrower to any of the aforementioned actions in this Section and Lender shall not have to give Notice to or obtain the consent of any guarantor or third-party obligor.

(b) Any forbearance by Lender in exercising any right or remedy under the Note, this Security Instrument, or any other Loan Document or otherwise afforded by applicable law, shall not be a waiver of or preclude the exercise of any right or remedy. The acceptance by Lender of payment of all or any part of the Indebtedness after the due date of such payment, or in an amount

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that is less than the required payment, shall not be a waiver of Lender’s right to require prompt payment when due of all other payments on account of the Indebtedness or to exercise any right or remedy for any failure to make prompt payment. Enforcement by Lender of any security for the Indebtedness shall not constitute an election by Lender of remedies so as to preclude the exercise of any other right available to Lender. Lender’s receipt of any proceeds or awards under Section 19 and Section 20 shall not operate to cure or waive any Event of Default.

25. LOAN CHARGES. If any applicable law limiting the amount of interest or other charges permitted to be collected from Borrower in connection with the Loan is interpreted so that any interest or other charge provided for in any Loan Document, whether considered separately or together with other charges provided for in any Loan Document, violates that law, and Borrower is entitled to the benefit of that law, that interest or charge is hereby reduced to the extent necessary to eliminate that violation. The amounts, if any, previously paid to Lender in excess of the permitted amounts shall be applied by Lender to reduce the principal of the Indebtedness. For the purpose of determining whether any applicable law limiting the amount of interest or other charges permitted to be collected from Borrower has been violated, all Indebtedness that constitutes interest, as well as all other charges made in connection with the Indebtedness that constitute interest, shall be deemed to be allocated and spread ratably over the stated term of the Note. Unless otherwise required by applicable law, such allocation and spreading shall be effected in such a manner that the rate of interest so computed is uniform throughout the stated term of the Note.

26. WAIVER OF STATUTE OF LIMITATIONS. To the extent permitted by law, Borrower hereby waives the right to assert any statute of limitations as a bar to the enforcement of the lien of this Security Instrument or to any action brought to enforce any of the Loan Documents.

27. WAIVER OF MARSHALLING. Notwithstanding the existence of any other security interests in the Mortgaged Property held by Lender or by any other party, Lender shall have the right to determine the order in which any or all of the Mortgaged Property shall be subjected to the remedies provided in this Security Instrument and the Note or applicable law. Lender shall have the right to determine the order in which any or all portions of the Indebtedness are satisfied from the proceeds realized upon the exercise of such remedies. Borrower and any party who now or in the future acquires a security interest in the Mortgaged Property and who has actual or constructive notice of this Security Instrument waives any and all right to require the marshalling of assets or to require that any of the Mortgaged Property be sold in the inverse order of alienation or that any of the Mortgaged Property be sold in parcels or as an entirety in connection with the exercise of any of the remedies permitted by applicable law or provided in this Security Instrument.

28. FURTHER ASSURANCES. Borrower shall execute, acknowledge, and deliver, at its sole cost and expense, all further acts, deeds, conveyances, assignments, estoppel certificates, financing statements, transfers and assurances as Lender may require from time to time in order to

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better assure, grant, and convey to Lender the rights intended to be granted, now or in the future, to Lender under this Security Instrument and the Note.

29. ESTOPPEL CERTIFICATE. Within ten (10) days after a request from Lender, Borrower shall deliver to Lender a written statement, signed and acknowledged by Borrower, certifying to Lender or any person designated by Lender, as of the date of such statement, (a) that the Note, (so long as the Loan is insured by HUD, the Borrower’s Regulatory Agreement) and this Security Instrument are unmodified and in full force and effect (or, if there have been modifications, that the Note, (so long as the Loan is insured by HUD, the Borrower’s Regulatory Agreement) and this Security Instrument are in full force and effect as modified and setting forth such modifications); (b) the unpaid principal balance of the Note; (c) the date to which interest under the Note has been paid; (d) that Borrower is not in default in paying the Indebtedness or in performing or observing any of the covenants or agreements contained in this Security Instrument, and the Note and (so long as the Loan is insured or held by HUD, the Borrower’s Regulatory Agreement) (or, if Borrower is in default, describing such default in reasonable detail); (e) whether or not there are then existing any setoffs or defenses known to Borrower against the enforcement of any right or remedy of Lender under the Note, (so long as the Loan is insured or held by HUD, the Borrower’s Regulatory Agreement) and this Security Instrument; and (f) any additional facts requested by Lender.

30. GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE.

(a) This Security Instrument and the Note, if it does not itself expressly identify the law that is to apply to it, shall be governed by the laws of the Property Jurisdiction, except so long as the Loan is insured or held by HUD and solely as to rights and remedies of HUD as such local or state laws may be preempted by federal law.

(b) Borrower agrees that any controversy arising under or in relation to the Note or this Security Instrument shall be litigated exclusively in the Property Jurisdiction except as, so long as the Loan is insured or held by HUD and , solely as to rights and remedies of HUD, federal jurisdiction may be appropriate pursuant to any federal requirements. The State courts, and with respect to HUD’s rights and remedies, federal courts and Governmental Authorities in the Property Jurisdiction shall have exclusive jurisdiction over all controversies which shall arise under or in relation to the Note, any security for the Indebtedness, or this Security Instrument. Borrower irrevocably consents to service, jurisdiction, and venue of such courts for any such litigation and waives any other venue to which it might be entitled by virtue of domicile, habitual residence or otherwise.

31. NOTICE.

(a) All Notices under or concerning this Security Instrument shall be in writing. Each Notice shall be addressed to the intended recipients at their respective addresses set forth in this Security Instrument , and shall be deemed given on the earliest to occur of (1) the date when the

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Notice is received by the addressee; (2) the first or second Business Day after the Notice is delivered to a recognized overnight courier service, with arrangements made for payment of charges for next or second Business Day delivery, respectively; or (3) the third Business Day after the Notice is deposited in the United States mail with postage prepaid, certified mail, return receipt requested. Failure of Lender to send Notice to Borrower or its Principal(s) shall not prevent the exercise of Lender’s rights or remedies under this Security Instrument or under the Loan Documents.

(b) Any party to this Security Instrument may change the address to which Notices intended for it are to be directed by means of Notice given to the other party in accordance with this Section 31. Each party agrees that it shall not refuse or reject delivery of any Notice given in accordance with this Section 31, that it shall acknowledge, in writing, the receipt of any Notice upon request by the other party and that any Notice rejected or refused by it shall be deemed for purposes of this Section 31 to have been received by the rejecting party on the date so refused or rejected, as conclusively established by the records of the U.S. Postal Service or the courier service.

(c) Any Notice under the Note which does not specify how Notice is to be given shall be given in accordance with this Section 31.

 
BORROWER:
Woodland Manor Property Holdings, LLC
 
 
1145 Hembree Rd.
 
 
Roswell, GA 30076
 
 
Attention: Manager
 
 
 
 
LENDER:
Housing & Healthcare Finance, LLC
 
 
2 Wisconsin Circle, Ste. 540
 
 
Chevy Chase, Maryland 20815
 
 
Attention: Erik Lindenauer, Director



32. SALE OF NOTE; CHANGE IN SERVICER. The Note or a partial interest in the Note (together with this Security Instrument) may be sold one or more times without prior Notice to Borrower. A sale may result in a change of the loan servicer. There also may be one or more changes of the loan servicer unrelated to a sale of the Note. If there is a sale or transfer of all or a partial interest in the Note or a change of the loan servicer, Lender shall be responsible for ensuring that Borrower is given Notice of the sale, transfer and/or change.

33. SINGLE ASSET BORROWER. Until the Indebtedness is paid in full or unless otherwise approved in writing by HUD so long as the Loan is insured or held by HUD, (a) Borrower

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shall be a single purpose entity and shall maintain the assets of the Mortgaged Property in segregated accounts in accordance with the Borrower’s Regulatory Agreement and Program Obligations and (b) Borrower (1) shall not acquire any real or personal property other than the Mortgaged Property and personal property related to the operation and maintenance of the Mortgaged Property, and so long as the Loan is insured or held by HUD, except pursuant to the Borrower’s Regulatory Agreement and Program Obligations and (2) shall not own or operate any business other than the ownership, management and/or operation of the Mortgaged Property, and so long as the Loan is insured or held by HUD, except pursuant to the Borrower’s Regulatory Agreement and Program Obligations.

34. SUCCESSORS AND ASSIGNS BOUND. This Security Instrument shall bind, and the rights granted by this Security Instrument shall inure to, the respective successors and assigns of Lender and Borrower.

35. JOINT AND SEVERAL LIABILITY. If more than one entity signs this Security Instrument as Borrower, the obligations of such entities shall be joint and several.

36. RELATIONSHIP OF PARTIES; NO THIRD PARTY BENEFICIARY.

(a) The relationship between Lender and Borrower shall be solely that of creditor and debtor, respectively, and nothing contained in this Security Instrument shall create any other relationship between Lender and Borrower.

(b) No creditor of any party to this Security Instrument and no other person (the term “person” includes, but is not limited to, any commercial or governmental entity or institution) shall be a third party beneficiary of this Security Instrument, the Note, or so long as the Loan is insured or held by HUD , the Borrower’s Regulatory Agreement. Without limiting the generality of the preceding sentence, (1) any servicing arrangement between Lender and any loan servicer for loss sharing or interim advancement of funds shall constitute a contractual obligation of such loan servicer that is independent of the obligation of Borrower for the payment of the Indebtedness, (2) Borrower shall not be a third party beneficiary of any servicing arrangement, and (3) no payment by the loan servicer under any servicing arrangement shall reduce the amount of the Indebtedness.

37. SEVERABILITY; AMENDMENTS. The invalidity or unenforceability of any provision of this Security Instrument shall not affect the validity or enforceability of any other provision, and all other provisions shall remain in full force and effect. This Security Instrument contains the entire agreement among the parties as to the rights granted and the obligations assumed in this Security Instrument. This Security Instrument may not be amended or modified except by a writing signed by the party against whom enforcement is sought.

38. RULES OF CONSTRUCTION. The captions and headings of the Sections of this Security Instrument are for convenience only and shall be disregarded in construing this Security

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Instrument. Any reference in this Security Instrument to an “ Exhibit ” or a “ Section ” shall, unless otherwise explicitly provided, be construed as referring, respectively, to an Exhibit attached to this Security Instrument or to a Section of this Security Instrument. All Exhibits attached to or referred to in this Security Instrument are incorporated by reference into this Security Instrument. Use of the singular in this Security Instrument includes the plural and use of the plural includes the singular. As used in this Security Instrument, the term “ including ” means “including, but not limited to.”

39. LOAN SERVICING. All actions regarding the servicing of the Note, including the collection of payments, the giving and receipt of Notice, inspections of the Mortgaged Property, inspections of books and records, and the granting of consents and approvals, may be taken by the loan servicer unless Borrower receives Notice to the contrary. If Borrower receives conflicting Notices regarding the identity of the loan servicer or any other subject, any such Notice from Lender shall govern; provided that so long as the Loan is insured or held by HUD, if Borrower receives conflicting Notice regarding the identity of the loan servicer or any other subject, any such Notice from Lender shall govern unless there is a Notice from HUD and, in all cases, any Notice from HUD governs notwithstanding any Notice from any other party.

40. DISCLOSURE OF INFORMATION. To the extent permitted by law, Lender may furnish information regarding Borrower or the Mortgaged Property to third parties with an existing or prospective interest in the servicing, enforcement, evaluation, performance, purchase or securitization of the Indebtedness, including but not limited to trustees, master servicers, special servicers, rating agencies, and organizations maintaining databases on the underwriting and performance of healthcare mortgage loans.

41. NO CHANGE IN FACTS OR CIRCUMSTANCES. Borrower certifies that all information in the application for the Loan submitted to Lender (the “ Loan Application ”) and in all financial statements, rent rolls, reports, certificates and other documents submitted in connection with the Loan Application are complete and accurate in all material respects and that there has been no material adverse change in any fact or circumstance that would make any such information incomplete or inaccurate. The submission of false or incomplete information shall be a Covenant Event of Default.

42. ESTOPPEL. The Lender is not the agent of HUD. Any action by Lender in exercising any right or remedy under this Security Instrument shall not be a waiver or preclude the exercise by HUD of any right or remedy which HUD might have under the Borrower’s Regulatory Agreement or other Program Obligations.

43. ACCELERATION; REMEDIES. If a Monetary Event of Default occurs and is continuing for a period of thirty (30) days, Lender, at Lender’s option, may declare the Indebtedness to be immediately due and payable without further demand, and may invoke the power of sale and any other remedies permitted by applicable law or provided in this Security Instrument or in the

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Note. Following a Covenant Event of Default, Lender, at Lender’s option, but so long as the Loan is insured or held by HUD, only after receipt of the prior written approval of HUD, may declare the Indebtedness to be immediately due and payable without further demand, and may invoke the power of sale and any other remedies permitted by applicable law or provided in this Security Instrument or in the Note, or seek the appointment of a receiver for the Healthcare Facility. Borrower acknowledges that the power of sale granted in this Security Instrument may be exercised by Lender without prior judicial hearing. Lender shall be entitled to collect all costs and expenses incurred in pursuing such remedies, including reasonable attorneys’ fees (including but not limited to appellate litigation), costs of documentary evidence, abstracts and title reports.

44. FEDERAL REMEDIES. In addition to any rights and remedies set forth in the Borrower’s Regulatory Agreement, HUD has rights and remedies under federal law so long as HUD is the insurer or holder of the Loan, including but not limited to the right to foreclose pursuant to the Multifamily Mortgage Foreclosure Act of 1981, 12 U.S.C. 3701 et seq ., as amended, when HUD is the holder of the Note.

45. REMEDIES FOR WASTE. In addition to any other rights and remedies set forth in the Note and this Security Instrument or those available under applicable law, including exemplary damages where permitted, the following remedies for Waste by Borrower are available to Lender as necessary to give complete redress to Lender for Lender’s loss or damage:

(a) the exercise of the remedies available to Lender during the existence of a Covenant Event of Default, as set forth in Section 43 of this Security Instrument;

(b) an injunction prohibiting future Waste or requiring correction of Waste already committed, but only to the extent that Waste has impaired or threatens to impair Lender’s security; and

(c) recovery of damages, limited by the amount of Waste, to the extent that Waste has impaired Lender’s security. So long as the Loan is insured or held by HUD, any recovery of damages by Lender or HUD for Waste shall be applied, at the sole discretion of HUD, (1) to fees, costs and expenses (including reasonable attorneys’ fees) incurred by Lender; (2) to remedy Waste of the Mortgaged Property, (3) to the Indebtedness or (4) for any other purpose designated by HUD.

46. TERMINATION OF HUD RIGHTS AND REFERENCES. At such time as HUD no longer insures or holds the Note, (a) all rights and responsibilities of HUD shall conclude, all mortgage insurance and references to mortgage insurance premiums, all references to HUD, Ginnie Mae and Program Obligations and related terms and provisions shall cease, and all rights and obligations of HUD shall terminate; (b) all obligations and responsibilities of Borrower to HUD shall likewise terminate; and (c) all obligations and responsibilities of Lender to HUD shall likewise terminate; provided, however, nothing contained in this Section 46, shall in any fashion discharge

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Borrower from any obligations to HUD under the Borrower’s Regulatory Agreement or Program Obligations or Lender from any obligations to HUD under Program Obligations, which occurred prior to termination of the Contract of Insurance. The provisions of this Section 46 shall be given effect automatically upon the termination of the Contract of Insurance or the transfer of this Security Instrument by HUD to another party, provided that upon the request of Borrower, Lender or the party to whom this Security Instrument has been transferred, at no cost to HUD, HUD shall execute such documents as may be reasonably requested to confirm the provisions of this Section 46.

47. CONSTRUCTION FINANCING [IF APPLICABLE]. The Indebtedness represents funds to be used in the construction of certain Improvements on the Land, in accordance with the Building Loan Agreement which is incorporated herein by reference to the same extent and effect as if fully set forth and made herein (provided, however, that if and to the extent that the Building Loan Agreement is inconsistent herewith, this Security Instrument shall govern). If the construction of the Improvements to be made pursuant to the Building Loan Agreement are not made in accordance with the terms of said Building Loan Agreement, or Borrower otherwise defaults under the Building Loan Agreement, Lender, after due Notice to Borrower, or any subsequent owner, is hereby vested with full and complete authority to enter upon the Land to employ watchmen to protect such Improvements from depredation or injury and to preserve and protect the Personalty therein, to continue any and all outstanding contracts for the erection and completion of said Improvements, to make and enter into any contracts and obligations wherever necessary, either in its own name or in the name of Borrower, or other owner, and to pay and discharge all debts, obligations, and liabilities incurred thereby. All such sums so advanced by Lender (exclusive of advances of the principal of the Indebtedness) shall be added to the principal of the Indebtedness secured hereby and all shall be secured by this Security Instrument and shall be due and payable on demand with interest at the rate provided in the Note, but no such advances shall be insured unless same are specifically approved by HUD prior to the making thereof. The Indebtedness shall, at the option of Lender or holder of this Security Instrument and the Note, become due and payable on the failure of Borrower, or other owner, to keep and perform any of the covenants, conditions and agreements of the Building Loan Agreement. This covenant shall be terminated upon the completion of the Improvements to the satisfaction of Lender and the making of the final advance as provided in the Building Loan Agreement.

48. ENVIRONMENTAL HAZARDS.

(a) Definitions:

(1)
“ Hazardous Materials ” means petroleum and petroleum products and compounds containing them, including gasoline, diesel fuel and oil; explosives; flammable materials; radioactive materials; polychlorinated biphenyls (“ PCBs ”) and compounds containing them; lead and lead-based paint; asbestos or asbestos-containing materials in any form that is or could

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become friable; underground or above-ground storage tanks, whether empty or containing any substance; any substance the presence of which on the Mortgaged Property is prohibited by any Governmental Authority; any substance that requires special handling; and any other material or substance now or in the future defined as a “hazardous substance,” “hazardous material,” “hazardous waste,” “toxic substance,” toxic pollutant,” “contaminant,” or “pollutant” within the meaning of any Hazardous Materials Law.

(2)
“ Hazardous Materials Laws ” means all federal, state, and local laws, ordinances and regulations and standards, rules, policies and other governmental requirements, administrative rulings and court judgments and decrees in effect now or in the future and including all amendments that relate to Hazardous Materials and apply to Borrower or to the Mortgaged Property. Hazardous Materials Laws include, but are not limited to, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq. , the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq. , the Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq. , the Clean Water Act, 33 U.S.C. Section 1251, et seq. , and the Hazardous Materials Transportation Act, 49 U.S.C. Section 5101, et seq. , and their state analogs.

(3)
“ Environmental Permit ” means any permit, license, or other authorization issued under any Hazardous Materials Law with respect to any activities or businesses conducted on or in relation to the Mortgaged Property.

(b) Except for (1) matters covered by a written program of operations and maintenance approved in writing by Lender (“ O&M Program ”), (2) matters described in subsection (c) of this Section 48; or (3) (for so long as the Loan is insured or held by HUD) matters covered by Program Obligations that may differ from this Section 48 (with respect to lead based paint requirements, for example), Borrower shall not cause or permit any of the following:

(i)
any occurrence or condition on the Mortgaged Property or any other property of Borrower that is adjacent to the Mortgaged Property, which occurrence or condition is or may be in violation of Hazardous Materials Laws; or

(ii)
any violation of or noncompliance with the terms of any Environmental Permit with respect to the Mortgaged Property or any property of Borrower that is adjacent to the Mortgaged Property.


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The matters described in clauses (i) and (ii) above are referred to collectively in this Section 48 as “ Prohibited Activities or Conditions ”.

(c) Prohibited Activities or Conditions shall not include the safe and lawful use and storage of quantities of (1) supplies, cleaning materials and petroleum products customarily used in the operation and maintenance of comparable healthcare properties, (2) cleaning materials, personal grooming items and other items sold in containers for consumer use and used by residents and occupants of residential dwelling units in the Mortgaged Property; and (3) petroleum products used in the operation and maintenance of motor vehicles and motor-operated equipment from time to time located on the Mortgaged Property’s parking areas, so long as all of the foregoing are used, stored, handled, transported and disposed of in compliance with Hazardous Materials Laws.

(d) Borrower shall take all commercially reasonable actions (including the inclusion of appropriate provisions in any Leases executed after the date of this Security Instrument) to prevent its employees, agents, and contractors, and all residents and other occupants from causing or permitting any Prohibited Activities or Conditions. Borrower shall not lease or allow the sublease or use of all or any portion of the Mortgaged Property to any resident or sublessee for nonresidential use by any user that, in the ordinary course of its business, would cause or permit any Prohibited Activities or Conditions.

(e) If an O&M Program has been established with respect to Hazardous Materials, Borrower shall comply in a timely manner with, and cause all employees, agents, and contractors of Borrower and any other persons encompassed by the O&M Program and present on the Mortgaged Property to comply with the O&M Program. All costs of performance of Borrower’s obligations under any O&M Program shall be paid by Borrower, and Lender’s out-of-pocket costs incurred in connection with the monitoring and review of the O&M Program and Borrower’s performance shall be paid by Borrower upon demand by Lender. Any such out-of-pocket costs of Lender which Borrower fails to pay promptly shall become an additional part of the Indebtedness as provided in Section 13; provided that so long as the Loan is insured by HUD, no advances made by Lender under this subsection (e) shall become an additional part of the Indebtedness unless such advances receive the prior written approval of HUD and provided further that unless approved by HUD, Lender shall have no obligation to make any such advances.

(f) Borrower represents and warrants to Lender that, except as previously disclosed by Borrower to Lender in writing:

(1)
Borrower has not at any time engaged in, caused or permitted any Prohibited Activities or Conditions;

(2)
to the best of Borrower’s knowledge after reasonable and diligent inquiry, no Prohibited Activities or Conditions exist or have existed;

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(3)
the Mortgaged Property does not now contain any underground storage tanks, and, to the best of Borrower’s knowledge after reasonable and diligent inquiry, the Mortgaged Property has not contained any underground storage tanks in the past. If there is an underground storage tank located on the Mortgaged Property that has been previously disclosed by Borrower to Lender in writing, that tank complies with all requirements of Hazardous Materials Laws;

(4)
Borrower has complied with all Hazardous Materials Laws, including all requirements for notification regarding releases of Hazardous Materials. Without limiting the generality of the foregoing, Borrower has obtained all Environmental Permits required for the operation of the Mortgaged Property in accordance with Hazardous Materials Laws now in effect and all such Environmental Permits are in full force and effect; no event has occurred with respect to the Mortgaged Property that constitutes, or with the passing of time or the giving of Notice would constitute, noncompliance with the terms of any Environmental Permit;

(5)
to the best of Borrower’s knowledge after reasonable and diligent inquiry, there are no actions, suits, claims or proceedings, pending or threatened, that involve the Mortgaged Property and allege, arise out of, or relate to any Prohibited Activities or Conditions; and

(6)
Borrower has not received any complaint, order, notice of violation or other communication from any Governmental Authority with regard to air emissions, water discharges, noise emissions or Hazardous Materials, or any other environmental, health or safety matters affecting the Mortgaged Property or any other property of Borrower that is adjacent to the Mortgaged Property that have not previously been resolved legally.

The representations and warranties in this Section 48 shall be continuing representations and warranties that shall be deemed to be made by Borrower throughout the term of the Loan, until the Indebtedness has been paid in full.

(g) Borrower shall promptly notify Lender in writing upon the occurrence of any of the following events:

(1)
Borrower’s discovery of any Prohibited Activities or Conditions;

(2)
Borrower’s receipt of or knowledge of any complaint, order, notice of violation or other communication from any Governmental Authority or other

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person with regard to present or future alleged Prohibited Activities or Conditions or any other environmental, health or safety matters affecting the Mortgaged Property or any other property of Borrower that is adjacent to the Mortgaged Property; and

(3)
any representation or warranty in this Section 48 becoming untrue after the date of this Security Instrument.

Any such Notice given by Borrower shall not relieve Borrower of, or result in a waiver of, any obligation under this Security Instrument, the Note, or any other Loan Document.

(h) Borrower shall pay promptly the costs of any environmental inspections, tests or audits (“ Environmental Inspections ”) required by Lender in connection with any foreclosure or deed in lieu of foreclosure, or as a condition of Lender’s consent to any transfer under Section 21, or required by Lender following a reasonable determination by Lender that Prohibited Activities or Conditions may exist. Any such costs incurred by Lender (including the fees and out-of-pocket costs of attorneys and technical consultants whether incurred in connection with any judicial (appellate or otherwise) or administrative process or otherwise) which Borrower fails to pay promptly shall become an additional part of the Indebtedness as provided in Section 13; provided that so long as the Loan is insured by HUD, no advances made by Lender under this subsection (h) shall become an additional part of the Indebtedness unless such advances receive the prior written approval of HUD and provided further that unless approved by HUD, Lender shall have no obligation to make such further advances. The results of all Environmental Inspections made by Lender shall at all times remain the property of Lender and Lender shall have no obligation to disclose or otherwise make available to any party other than Borrower, and so long as the Loan is insured by HUD, to HUD, such results or any other information obtained by Lender in connection with its Environmental Inspections. Lender hereby reserves the right, and Borrower hereby expressly authorizes Lender, to make available to any party, including any prospective bidder at a foreclosure sale of the Mortgaged Property, the results of any Environmental Inspections made by Lender with respect to the Mortgaged Property. Borrower consents to Lender notifying any party (either as part of a notice of sale or otherwise) of the results of any of Lender’s Environmental Inspections. Borrower acknowledges that Lender cannot control or otherwise assure the truthfulness or accuracy of the results of any of its Environmental Inspections and that the release of such results to prospective bidders at a foreclosure sale of the Mortgaged Property may have a material and adverse effect upon the amount which a party may bid at such sale. Borrower agrees that Lender shall have no liability whatsoever as a result of delivering the results of any of its Environmental Inspections to any third party, and Borrower hereby releases and forever discharges Lender from any and all claims, damages, or causes of action, arising out of, connected with or incidental to the results of, the delivery of any of Lender’s Environmental Inspections.

(i) If any investigation, site monitoring, containment, clean-up, restoration or other remedial work (“ Remedial Work ”) is necessary to comply with any Hazardous Materials Law that has or acquires jurisdiction over the Mortgaged Property or the use, operation or improvement of

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the Mortgaged Property under any Hazardous Materials Law, Borrower shall, by the earlier of (1) the applicable deadline required by the Hazardous Materials Law or (2) thirty (30) days after Notice from Lender demanding such action, begin performing the Remedial Work, and thereafter diligently prosecute it to completion, and shall in any event complete the work by the time required by applicable Hazardous Materials Law. If Borrower fails to begin on a timely basis or diligently prosecute any required Remedial Work, Lender may, at its option, cause the Remedial Work to be completed, in which case Borrower shall reimburse Lender on demand for the cost of doing so. So long as the Loan is insured by HUD, no advances made by Lender under this subsection (i) shall become part of the Indebtedness as provided in Section 13 unless such advances receive the prior written approval of HUD and provided further that unless approved by HUD, Lender shall have no obligation to make any such advances.

(j) Borrower shall cooperate with any inquiry by any Governmental Authority and shall comply with any governmental or judicial order which arises from any alleged Prohibited Activities or Conditions.

(k) Borrower shall indemnify [if Borrower is located in a state that requires an indemnification agreement separate and apart from this Security Instrument, Borrower shall provide said indemnification agreement to Lender] , hold harmless and defend (1) Lender, (2) any prior owner or holder of the Note, (3) the loan servicer, (4) any prior loan servicer, (5) the officers, directors, shareholders, partners, employees and trustees of any of the foregoing, and (6) the heirs, legal representatives, successors and assigns of each of the foregoing (each an “ Indemnitee ”, and collectively, “ Indemnitees ”) from and against all proceedings, claims, damages, penalties and costs (whether initiated or sought by Governmental Authorities or private parties), including fees and out of pocket expenses of attorneys and expert witnesses, investigatory fees, and remediation costs, whether incurred in connection with any judicial (including appellate) or administrative process or otherwise, arising directly or indirectly from any of the following except where the Mortgaged Property became contaminated subsequent to any transfer of ownership which was approved in writing by Lender (and so long as the Loan is insured or held by HUD, by HUD), provided such transferee assumes in writing all obligations of Borrower with respect to Prohibited Activities or Conditions:

(i)
any breach of any representation or warranty of Borrower in this Section 48;

(ii)
any failure by Borrower to perform or comply with any of its obligations under this Section 48;

(iii)
the existence or alleged existence of any Prohibited Activities or Conditions;

(iv)
the actual or alleged violation of any Hazardous Materials Law.


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(l) Counsel selected by Borrower to defend Indemnitees shall be subject to the approval of those Indemnitees. However, any Indemnitee may elect to defend any claim or legal or administrative proceeding at Borrower’s expense.

(m) Borrower shall not, without the prior written consent of those Indemnitees who are named as parties to a claim or legal or administrative proceeding (“ Claim ”), settle or compromise the Claim if the settlement (1) results in the entry of any judgment that does not include as an unconditional term the delivery by the claimant or plaintiff to Lender of a written release of those Indemnitees, satisfactory in form and substance to Lender; or (2) may materially and adversely affect Lender, as determined by Lender in its discretion.

(n) Borrower’s obligation to indemnify the Indemnitees shall not be limited or impaired by any of the following, or by any failure of Borrower or any guarantor to receive Notice of or consideration for any of the following:

(1)
any amendment or modification of any Loan Document;

(2)
any extensions of time for performance required by any Loan Document;

(3)
the accuracy or inaccuracy of any representations and warranties made by Borrower under this Security Instrument or any other Loan Document;

(4)
the release of Borrower or any other person, by Lender or by operation of law, from performance of any obligation under any Loan Document;

(5)
the release or substitution in whole or in part of any security for the Indebtedness; and

(6)
Lender’s failure to properly perfect any lien or security interest given as security for the Indebtedness.

(o) Borrower shall, at its own cost and expense, do all of the following:

(1)
pay or satisfy any judgment or decree that may be entered against any Indemnitee or Indemnitees in any legal or administrative proceeding incident to any matters against which Indemnitees are entitled to be indemnified under this Section 48;

(2)
reimburse Indemnitees for any expenses paid or incurred in connection with any matters against which Indemnitees are entitled to be indemnified under this Section 48; and

(3)
reimburse Indemnitees for any and all expenses, including fees and out-of-

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pocket expenses of attorneys and expert witnesses, paid or incurred in connection with the enforcement by Indemnitees of their rights under this Section 48, or in monitoring and participating in any legal (including appellate) or administrative proceeding.

(p) In any circumstances in which the indemnity under this Section 48 applies, Lender may employ its own legal counsel and consultants to prosecute, defend or negotiate any claim or legal or administrative proceeding and Lender, with the prior written consent of Borrower (which shall not be unreasonably withheld, delayed or conditioned), may settle or compromise any action or legal or administrative proceeding. Borrower shall reimburse Lender upon demand for all costs and expenses incurred by Lender, including all costs of settlements entered into in good faith, and the fees and out of pocket expenses of such attorneys (including but not limited to appellate litigation) and consultants.

(q) The provisions of this Section 48 shall be in addition to any and all other obligations and liabilities that Borrower may have under applicable law or under other Loan Documents, and each Indemnitee shall be entitled to indemnification under this Section 48 without regard to whether Lender or that Indemnitee has exercised any rights against the Mortgaged Property or any other security, pursued any rights against any guarantor, or pursued any other rights available under the Loan Documents or applicable law. If Borrower consists of more than one entity, the obligation of those entities to indemnify the Indemnitees under this Section 48 shall be joint and several. The obligation of Borrower to indemnify the Indemnitees under this Section 48 shall survive any repayment or discharge of the Indebtedness, any foreclosure proceeding, any foreclosure sale, any delivery of any deed in lieu of foreclosure, and any release of record of the lien of this Security Instrument. Notwithstanding anything in Section 48 to the contrary, so long as the Loan is insured or held by HUD, indemnification costs and reimbursements to Lender or to any or all Indemnitees shall be paid only from the available proceeds of an appropriate insurance policy or from Surplus Cash (if applicable) or other escrow accounts.

(r) So long as the Loan is insured or held by HUD, all references to Lender in this Section 48 shall also be construed to refer to HUD as its interest appears (solely as determined by HUD) and all notifications to Lender must also be made to HUD and all Lender approvals and exercises of discretion by Lender under this Section 48 must first have the prior written approval of HUD, provided, that, so long as the Loan is insured or held by HUD, the reference to Lender as an Indemnitee shall be construed to refer to HUD, and Borrower’s obligations to indemnify HUD as an Indemnitee shall remain in effect in accordance with this Section 48, notwithstanding the termination or expiration of insurance of the Loan by HUD.

(s) To the extent any HUD environmental requirements or standards are inconsistent or conflict with the provisions of this Section 48, the HUD requirements or standards shall control so long as the Loan is insured or held by HUD.

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49. COUNTERPART SIGNATURES. This document may be executed in counterpart.

50. STATE LAW REQUIRMENTS. See Exhibit B attached hereto and made a part hereof.

51. ATTACHED EXHIBITS. The following Exhibits are attached to this Security Instrument:

        
x
Exhibit A
Description of the Land (required)
 
 
 
 
 
x
Exhibit B
Modifications to Security Instrument
 
 
 
 
 
    

                


    
[ SIGNATURE PAGE FOLLOWS ]

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IN WITNESS WHEREOF , Borrower has signed and delivered this Security Instrument or has caused this Security Instrument to be signed and delivered by its duly authorized representative, as a sealed instrument , to be effective as of the date first above written .

BORROWER:
WOODLAND MANOR PROPERTY HOLDINGS, LLC,
a Georgia limited liability company

By:
/s/ Ronald W. Fleming
 
 
 
Name:
Ronald W. Fleming
 
 
 
Title:
Manager
 
 
 
            

ACKNOWLEDGMENT

STATE OF GEORGIA
)
 
 
 
 
) ss:
 
 
COUNTY OF FULTON
)
 
 


On this 12th day of SEPTEMBER, 2014, before me, the undersigned, a Notary Public in and for said State, personally appeared RONALD W. FLEMING, the MANAGER of WOODLAND MANOR PROPERTY HOLDINGS, LLC, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument.

[SEAL]
 
 
/s/ Ellen W. Smith
 
 
 
Notary Public
                
 
 
 
My Commission Expires:
 
 
 
                                            

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EXHIBIT A


Real property in the City of Springfield, County of Clark, State of Ohio, described as follows:

Parcel I:

Lying in Section 20, Town 5, Range 10, City of Springfield, Moorefield Township, Clark County, Ohio.

Being all of that tract of land in the name of Woodland Manor Limited Partnership, an Ohio limited partnership, as deeded and described in Official Record Book 423, Page 345 of the Clark County records of deeds and being more particularly described as follows:

Beginning for reference at a PK nail set over a stone at the intersection of centerlines of Villa Road (100 feet wide) and Middle Urban Road (100 feet wide);

Thence, with the centerline of Villa Road, N 85° 34’ 25” W. a distance of 319.73 feet to a railroad spike set;

Thence, N 4° 24’ 08” E. 50.00 feet to a 5/8” iron rod set at the true point of beginning;

Thence, with the lines of the Eaglewood Villa, Ltd. 4.522 acre tract (Vol. 803, Page 795) the following thirteen courses:

N. 4° 24’ 08” E. a distance of 130.99 feet to a railroad spike set;

N. 31° 04’ 08” E. a distance of 47.50 feet to a PK nail set in a drill hole in concrete;

N. 58° 51’ 45” W. a distance of 82.58 feet to a point against the East wall of the Eaglewood Villa, Ltd. building, passing a 5/8” iron rod set at 80.58 feet;

N. 30° 58’ 34” E. with the East face of said wall, a distance of 47.00 feet to a point at an angle in the wall;

S. 59° 00’ 13” E. with a South face of the Eaglewood Villa, Ltd. wall, a distance of 43.89 feet to a point at an angle in the said wall;

N. 30° 59’ 47” E. a distance of 15.00 feet to a PK nail set in a drill hole in concrete passing the North wall of the Woodland Manor Limited Partnership building at 13.70 feet;

S. 59° 00’ 13” E. parallel and 1.30 feet North from a North wall of the Woodland Manor Limited Partnership building, a distance of 23.00 feet to a PK nail set in a drill hole in concrete;


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N. 30° 59’ 47” E. parallel and 0.67 feet West from a West wall of the Woodland manor Limited Partnership building, a distance of 56.32 feet to a 5/8” iron rod set;

N. 21° 37’ 11” W. a distance of 49.06 feet to a PK nail set in a concrete sidewalk;

With a curve to the right having a radius of 134.42 feet, a central angle of 43° 08’ 34” and a chord distance of 98.84 feet bearing N. 80° 38’ 28” E. an arc distance of 101.22 feet to a 5/8” iron rod set;

With a curve to the right having a radius of 234.00 feet, a central angle of 16° 37’ 25” and a chord distance of 67.65 feet bearing S. 69° 28’ 47” E. an arc distance of 67.89 feet to a 5/8” iron rod set;

With a curve to the right having a radius of 175.00 feet, a central angle of 23° 44’ 33” and a chord distance of 72.00 feet bearing S. 73° 02’ 10” E. an arc distance of 72.52 feet to a 5/8” iron rod set;

S. 84° 54’ 26” E. a distance of 13.81 feet to a 5/8” iron rod set, passing a 5/8” iron rod set at 3.81 feet;

Thence with the West line of the City of Springfield, Ohio’s 1.111 acres (Volume 305, Page 892), S. 5° 02’ 50” W. a distance of 319.58 feet to a 5/8” iron rod set;

Thence with the North lie of the City of Springfield, Ohio’s 1.111 acres N. 85° 34’ 25” W. a distance of 280.29 feet to the place of beginning;

Containing 2.128 acres o which 0.073 acre is within the street rights-of-way.

The basis for bearing is based upon the centerline of Middle Urban Road being S. 5° 02’ 50” W, and all other bearing are from angles and distances measured in a field survey by Lee Surveying and Mapping Company on June 22, 1993.

Description prepared by Jeffrey I. Lee, Professional Surveyor 6359, on June 21, 1993.

Parcel II:

Together with Easements as contained in Reciprocal Easement Agreement by and between Woodland Manor Property Holdings, LLC and Eaglewood Property Holdings, LLC, dated December 30, 2011 and recorded at Deed Book 1948, Page 2414, Clark County, Ohio, Records.



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EXHIBIT B

Modifications to Security Instrument

The following modifications are made to the text of the Security Instrument of which this Exhibit is a part:

The following sections are inserted into the Security Instrument and made a part thereof:

8. IMPOSITION DEPOSITS.

(e) Borrower and Lender confirm that all amounts disbursed by Lender under this Security Instrument for payment of taxes, insurance premiums and other costs and expenses in connection with the operation, protection or preservation of the Mortgaged Property or in this Security Instrument are intended to comply with Section 5301.233 of the Ohio Revised Code. In addition to any other debt or obligation, this Security Instrument shall secure unpaid balances of advances made with respect to the Mortgaged Property for the payment of Taxes, insurance premiums or costs incurred for the protection of the Mortgaged Property to the fullest extent and with the highest priority contemplated by said Section 5301.233 of the Ohio Revised Code.

50. OPEN-END MORTGAGE FUTURE ADVANCES

Borrower and Lender intend that this Security Instrument shall secure the unpaid balance of loan advances made by the holder hereof after this Security Instrument is delivered to the Clark County Recorder for record to the fullest extent and with the highest priority contemplated by Section 5301.232 of the Ohio Revised Code. The maximum amount of all loan advances, in the aggregate and exclusive of interest accrued thereon and protective advances made as contemplated in Sections 8 and 13 of this Security Instrument which may be outstanding at any time, is FIVE MILLION SIX HUNDRED SEVENTY EIGHT THOUSAND FOUR HUNDRED and NO/100 Dollars ($5,678,400.00). If and to the extent applicable, Borrower hereby waives any right it may have under Section 5301.232(C) of the Ohio Revised Code.




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Exhibit 10.24

Security Instrument/ Mortgage/Deed of Trust
Section 232
U.S. Department of Housing
and Urban Development
Office of Residential
Care Facilities
OMB Approval No. 2502-0605
(exp. 06/30/2017)

Public reporting burden for this collection of information is estimated to average 0.5 hours. This includes the time for collecting, reviewing, and reporting the data. The information is being collected to obtain the supportive documentation which must be submitted to HUD for approval, and is necessary to ensure that viable projects are developed and maintained. The Department will use this information to determine if properties meet HUD requirements with respect to development, operation and/or asset management, as well as ensuring the continued marketability of the properties. This agency may not collect this information, and you are not required to complete this form, unless it displays a currently valid OMB control number.

Warning: Any person who knowingly presents a false, fictitious, or fraudulent statement or claim in a matter within the jurisdiction of the U.S. Department of Housing and Urban Development is subject to criminal penalties, civil liability, and administrative sanctions.


HEALTHCARE DEED TO SECURE DEBT,
ASSIGNMENT OF LEASES, RENTS AND REVENUE
AND SECURITY AGREEMENT
(GEORGIA)



FHA Project Number: 061-22138
Project Name: GLENVUE HEALTH & REHAB CENTER




Document Prepared by, and
After recording return to:
Jeremy F. Segall, Esq.
GUTNICKI LLP
4711 Golf Rd., Ste. 200
Skokie, Illinois 60076

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TABLE OF CONTENTS
SECTION
 
PAGE
 
 
 
 
1
Definitions.............................................................................
 
5
2
Uniform Commercial Code Security Agreement..................
 
14
3
Control of Deposit Accounts…………………...…………..
 
15
4
Assignment of Leases; Leases Affecting the
 
 
 
Mortgaged Property .............................................................
 
16
5
Payment of Indebtedness; Performance Under the Loan
 
 
 
Documents; Prepayment Premium…...................................
 
17
6
Exculpation ..........................................................................
 
17
7
Deposits for Taxes, Insurance and Other Charges ...............
 
18
8
Imposition Deposits .............................................................
 
19
9
Regulatory Agreement .........................................................
 
20
10
Application of Payments ......................................................
 
21
11
Compliance with Laws ........................................................
 
21
12
Use of Property ....................................................................
 
21
13
Protection of Lender’s Security ...........................................
 
22
14
Inspection..............................................................................
 
22
15
Books and Records; Financial Reporting.............................
 
22
16
Taxes; Operating Expenses...................................................
 
23
17
Liens; Encumbrances ...........................................................
 
23
18
Preservation, Management and Maintenance of
 
 
 
the Mortgaged Property ........................................................
 
24
19
Property and Liability Insurance...........................................
 
24
20
Condemnation ......................................................................
 
27
21
Transfers of the Mortgaged Property or Interests in
 
 
 
Borrower ...............................................................................
 
27
22
Events of Default ..................................................................
 
28
23
Remedies Cumulative ...........................................................
 
29
24
Forbearance...........................................................................
 
29
25
Loan Charges……………………………………………….
 
30
26
Waiver of Statute of Limitations...........................................
 
30
27
Waiver of Marshalling ..........................................................
 
30
28
Further Assurances................................................................
 
30
29
Estoppel Certificate...............................................................
 
31
30
Governing Law; Consent to Jurisdiction and Venue ............
 
31
31
Notice....................................................................................
 
31
32
Sale of Note; Change in Servicer..........................................
 
32
33
Single Asset Borrower .........................................................
 
32
 
 
 
 

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34
Successors and Assigns Bound.............................................
 
33
35
Joint and Several Liability ...................................................
 
33
36
Relationships of Parties; No Third Party Beneficiary...........
 
33
37
Severability; Amendments....................................................
 
33
38
Rules of Construction ...........................................................
 
33
39
Loan Servicing......................................................................
 
34
40
Disclosure of Information.....................................................
 
34
41
No Change in Facts or Circumstances..................................
 
34
42
Estoppel.................................................................................
 
34
43
Acceleration; Remedies .......................................................
 
34
44
Federal Remedies.................................................................
 
35
45
Remedies for Waste .............................................................
 
35
46
Termination of HUD Rights and References .......................
 
35
47
[Construction Financing] .....................................................
 
35
48
Environmental Hazards ........................................................
 
36
49
Counterpart Signatures..........................................................
 
43
50
[State Law Requirements]………………………………….
 
43
51
Attached Exhibits…………………………………………..
 
43
 
 
 
 


EXHIBIT A  - LEGAL DESCRIPTION OF THE LAND ..............................................
45

EXHIBIT B  - MODIFICATION TO THE SECURITY INSTRUMENT........................
46


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HEALTHCARE DEED TO SECURE DEBT,
 
 
ASSIGNMENT OF LEASES, RENTS AND REVENUE AND
 
 
SECURITY AGREEMENT
 

THIS HEALTHCARE DEED TO SECURE DEBT, ASSIGNMENT OF LEASES, RENTS AND REVENUE AND SECURITY AGREEMENT, WHICH, FOR AS LONG AS THE LOAN IS INSURED OR HELD BY HUD, SHALL BE DEEMED TO BE THE MORTGAGE AS DEFINED BY PROGRAM OBLIGATIONS (this “ Security Instrument ”), is made as of this 24th day of September, 2014, by and between GLENVUE H&R PROPERTY HOLDINGS, LLC, a limited liability company organized and existing under the laws of Georgia, whose address is 1145 Hembree Rd., Roswell, Georgia 30076, as grantor, trustor and borrower (“ Borrower ”), to HOUSING & HEALTHCARE FINANCE, LLC, as Lender (“ Lender ”), a limited liability company organized and existing under the laws of Delaware, whose address is 2 Wisconsin Circle, Suite 540, Chevy Chase, Maryland 20815.

Borrower, in consideration of the Indebtedness and the security interest created by this Security Instrument, irrevocably grants, conveys and assigns to Lender and Lender’s successors and assigns, with power of sale, the Mortgaged Property, including the Land located in Tattnall County, State of Georgia and described in Exhibit A , attached to and incorporated in this Security Instrument, to have and to hold the Mortgaged Property unto Lender and Lender’s successors and assigns. As used in this Security Instrument, the term “Mortgaged Property” is synonymous with the term “Secured Property,” and the term “lien” is synonymous with the term “security interest and title.”

TO SECURE TO LENDER the repayment of the Indebtedness evidenced by the Note from Borrower payable to Lender dated as of the date of this Security Instrument, and maturing on October 1, 2044, in the principal amount of EIGHT MILLION EIGHT HUNDRED SIXTEEN THOUSAND EIGHT HUNDRED and NO/100 Dollars ($8,816,800.00) (the “ Loan ”), and all renewals, extensions and modifications of the Indebtedness, and the performance of the covenants and agreements of Borrower contained in this Security Instrument and the Note.

Borrower represents and warrants that Borrower is lawfully seized of the Mortgaged Property and has the right, power and authority to mortgage, grant, convey and assign the Mortgaged Property, and that the Mortgaged Property is unencumbered except for easements and restrictions listed in a schedule of exceptions to coverage in any title insurance policy issued to Lender contemporaneously with the execution and recordation of this Security Instrument and insuring Lender’s interest in the Mortgaged Property. Borrower covenants that Borrower shall warrant and defend generally such title to the Mortgaged Property against all claims and demands, subject to said easements and restrictions.

Covenants. Borrower and Lender covenant and agree as follows:


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1. DEFINITIONS. The definition of any capitalized term or word used herein can be found in this Security Instrument, and if not found in this Security Instrument, then found in the Borrower’s Regulatory Agreement and/or in the Note. The following terms, when used in this Security Instrument (including when used in the above recitals), shall have the following meanings:

“ Accounts Receivable ” means all right, title and interest of Operator in and to the following, in each case arising from the operation of the Healthcare Facility located on the Mortgaged Property in the ordinary course of business: (a) all rights to payment of a monetary obligation, whether or not earned by performance, including, but not limited to, accounts receivable, health-care insurance receivables, Medicaid and Medicare receivables, Veterans Administration receivables, or other governmental receivables, private patient receivables, and HMO receivables, (b) payment intangibles, (c) guaranties, letter-of-credit rights and other supporting obligations relating to the property described in clauses (a) and (b); and (d) all of the proceeds of the property described in clauses (a), (b) and (c). Notwithstanding the foregoing, “Accounts Receivable” shall not include accounts arising from the sale of Operator’s equipment, inventory or other goods, other than accounts arising from the sale of Operator’s inventory in the ordinary course of Operator’s business.

“ Affiliate ” is defined in 24 C.F.R. 200.215, or any successor regulation.

“ Ancillary Agreement ” means any separate agreement between Borrower and Lender for the purpose of establishing escrows or replacement reserves for the Mortgaged Property, establishing an account to assure the completion of repairs or improvements specified in such agreement, or any other agreement or agreements between Borrower and Lender which provide for the establishment of any other fund, reserve or account including but not limited to those reserves and escrows required by HUD in connection with construction activity, if any, and those reserves and escrows required by HUD in connection with the Project. Such agreements may include, but are not limited to, any sinking fund agreement, which provides for a depreciation reimbursement account to pay future principal payments under the Note, where Medicaid or third-party reimbursement is on a depreciation plus interest basis; any depreciation reserve fund agreement which provides for an escrow or trust account with an approved custodian or trustee established for replacing equipment and for funding of depreciation in accordance with a schedule approved by HUD.

“ Approved Use ” means the use of the Project for the operation of the Healthcare Facility as a nursing home facility with 160 beds, of which not less than 160 beds are in use and such other uses as may be approved in writing from time to time by HUD based upon a request made by Borrower, Master Tenant, or Operator, but excluding any uses that are discontinued with the written approval of HUD.

“ Assisted Living Facility ” means a public facility, proprietary facility, or facility of a private nonprofit corporation or association that (1) is licensed and regulated by the State (or if there is no

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state law providing for such licensing and regulation by the State, by the municipality or other political subdivision) in which the facility is located; (2) makes available to residents supportive services to assist the residents in carrying out activities of daily living, and may make available to residents home healthcare services, such as nursing and therapy; and (3) provides separate dwelling units for residents, each of which may contain a full kitchen and bathroom, and which includes common rooms and other facilities appropriate for the provision of supportive service to the residents of the facility.

“ Board and Care Home ” means any residential facility providing room, board, and continuous protective oversight that is regulated by a State pursuant to the provisions of Section 1616(e) of the Social Security Act.

“ Borrower ” means all persons or entities identified as Borrower in the first paragraph of this Security Instrument, together with any successors, heirs, and assigns (jointly and severally). Borrower shall include any person or entity taking title to the Mortgaged Property whether or not such person or entity assumes the Note. Whenever the term “Borrower” is used herein, the same shall be deemed to include the obligor of the debt secured by this Security Instrument, and so long as the Note is insured or held by HUD, shall also be deemed to be the mortgagor as defined by Program Obligations.

“ Borrower-Operator Agreement ” means any agreement relating to the management and operation of the Healthcare Facility by and between Borrower Master Tenant and Operator, including any Operator Lease.

“ Borrower’s Regulatory Agreement ” means that certain Healthcare Regulatory Agreement - Borrower relating to the Project, and made by Borrower for the benefit of HUD.

“ Building Loan Agreement ” means the HUD-approved form of the agreement between Borrower and Lender setting forth the terms and conditions for a HUD-insured construction loan.

“ Business Day ” means any day other than a Saturday, a Sunday, a federal holiday or other day on which the federal government by law or executive order is closed, or a day on which banking institutions in the State are authorized or obligated by law or executive order to remain closed.

“ Contract of Insurance ” is defined in 24 C.F.R. Part 232.800(a).

“ Covenant Event of Default ” is defined in Section 22.

“ Event of Default ” means a Monetary Event of Default or a Covenant Event of Default, as each is defined in Section 22 and according to the provision of Section 22.

“ Fixtures ” means all property or goods that become so related or attached to the Land or the Improvements that an interest arises in them under real property law, whether acquired now or in

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the future, excluding all resident owned goods and property, and including but not limited to: major movable equipment, machinery, equipment (including medical equipment and systems), engines, boilers, incinerators, installed building materials; systems and equipment for the purpose of supplying or distributing heating, cooling, electricity, gas, water, air, or light; antennas, cable, wiring and conduits used in connection with radio, television, computers and computer software, medical systems, security, fire prevention, or fire detection or otherwise used to carry electronic signals; telephone systems and equipment; elevators and related machinery and equipment; fire detection, prevention and extinguishing systems and apparatus; security and access control systems and apparatus; plumbing systems; water heaters, ranges, stoves, microwave ovens, refrigerators, dishwashers, garbage disposals, washers, dryers and other appliances; light fixtures, awnings, storm windows and storm doors; pictures, screens, blinds, shades, curtains and curtain rods; mirrors; cabinets, paneling, rugs and floor and wall coverings; fences, trees and plants; swimming pools; playground and exercise equipment and classroom furnishings and equipment.

“ Governmental Authority ” means any board, commission, department or body of any municipal, county, state, tribal or federal governmental unit, including any United States territorial government, and any public or quasi-public authority, or any subdivision of any of them, that has or acquires jurisdiction over the Mortgaged Property, including the use, operation or improvement of the Mortgaged Property.

“ Healthcare Facility ” means that portion of the Project operated on the Land as a Nursing Home, Intermediate Care Facility, Board and Care Home, Assisted Living Facility and/or any other healthcare facility authorized to receive insured mortgage financing pursuant to Section 232 of the National Housing Act, as amended, including any commercial space included in the facility.

“ Healthcare Facility Working Capital ” means current assets of the Healthcare Facility minus current liabilities of the Healthcare Facility, pursuant to Generally Accepted Accounting Principles, as Program Obligations may further clarify or define.

“ HUD ” means the U.S. Department of Housing and Urban Development acting by and through the Secretary in the capacity as insurer or holder of the Loan under the authority of the National Housing Act, as amended, the Department of Housing and Urban Development Act, as amended, or any other federal law or regulation pertaining to the Loan or the Project.

“ Impositions ” is defined in Section 8.

“ Imposition Deposits ” is defined in Section 8.

“ Improvements ” means the buildings, structures, and alterations now constructed or at any time in the future constructed or placed upon the Land, including any future replacements and additions.


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“ Indebtedness ” means the principal of, interest on, and all other amounts due at any time under the Note or the Loan Documents, including prepayment premiums, late charges, default interest, and advances to protect the security as provided in the Loan Documents.

“ Land ” means the estate in realty described in Exhibit A .

“ Leases ” means any and all Operator Leases, Master Leases, Residential Agreements, and any other present and future leases, subleases, licenses, concessions or grants or other possessory interests now or hereafter in force, whether oral or written, covering or affecting the Project, or any portion of the Project, and all modifications, extensions or renewals. Any ground lease to the Borrower creating a leasehold interest in the Land that is security for the Loan is not included in this definition.

“ Lender ” means the entity identified as “Lender” in the first paragraph of this Security Instrument, or any subsequent holder of the Note, and whenever the term “Lender” is used herein, the same shall be deemed to include the obligee, or the Trustee(s) and the beneficiary of this Security Instrument, and so long as the Loan is insured or held by HUD, shall also be deemed to be the mortgagee as defined by Program Obligations.

“ Lien ” is defined in Section 17.

“ Loan ” is defined in the opening paragraphs of this Security Instrument.

“ Loan Application ” is defined in Section 41.

“ Loan Documents ” means this Security Instrument, the Note, the Borrower’s Regulatory Agreement , the Master Tenant’s Regulatory Agreement, the Operator’s Regulatory Agreement, and all other agreements, instruments, and documents which are now existing or are in the future required by, delivered to, and/or assigned to Lender and/or HUD in connection with or related to the Loan, whether executed or delivered by or on behalf of Borrower or Operator or Master Tenant, as such documents may be amended from time to time, provided that the Borrower-Operator Agreement and the Master Lease, and any amendments thereto, shall not be considered Loan Documents.

“ Master Lease ” means that certain Master Lease Agreement, in which the Healthcare Facility is aggregated with other HUD-insured healthcare facilities and leased to the Master Tenant.

“ Master Tenant ” means 2014 HUD MASTER TENANT, LLC, a limited liability company organized and existing under the laws of Georgia, the master tenant pursuant to the Master Lease.

“ Master Tenant’s Regulatory Agreement ” means that certain Healthcare Regulatory Agreement

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- Master Tenant, relating to the Project and entered into by Master Tenant for the benefit of HUD.

“ Monetary Event of Default ” is defined in Section 22.

“ Mortgaged Property ” means all of Borrower’s present and future right, title and interest in and to all of the following, whether now owned or held or later acquired:

(1)
the Land;

(2)
the Healthcare Facility;

(3)
the Improvements;

(4)
the Fixtures;

(5)
the Personalty;

(6)
all current and future rights, including air rights, development rights, zoning rights and other similar rights or interests, easements, tenements, rights-of-way, strips and gores of land, streets, alleys, roads, sewer rights, waters, watercourses, and appurtenances related to or benefiting the Land or the Improvements, or both, and all rights-of-way, streets, alleys and roads which may have been or may in the future be vacated;

(7)
all insurance policies covering any of the Mortgaged Property, and all proceeds paid or to be paid by any insurer of the Land, the Improvements, the Fixtures, the Personalty or any other part of the Mortgaged Property, whether or not Borrower obtained the insurance pursuant to Lender’s requirement;

(8)
all awards, payments and other compensation made or to be made by any Governmental Authority with respect to the Land, the Improvements, the Fixtures, the Personalty or any other part of the Mortgaged Property, including any awards or settlements resulting from condemnation proceedings or the total or partial taking of the Land, the Improvements, the Fixtures, the Personalty or any other part of the Mortgaged Property under the power of eminent domain or otherwise and including any conveyance in lieu thereof;

(9)
all contracts, options and other agreements for the sale of the Land, the Improvements, the Fixtures, the Personalty or any other part of the Mortgaged Property entered into by Borrower now or in the future, including cash or securities deposited to secure performance by parties of their obligations;

(10)
all proceeds (cash or non-cash), liquidated claims or other consideration from the

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conversion, voluntary or involuntary, of any of the Mortgaged Property and the right to collect such proceeds, liquidated claims or other consideration;

(11)
all revenue generated by any portion of the Mortgaged Property and any Leases;

(12)
all earnings, royalties, instruments, accounts (including any deposit accounts), Accounts Receivable, supporting obligations, issues and profits from the Land, the Improvements, the Healthcare Facility, or any other part of the Mortgaged Property, and all undisbursed proceeds of the Loan;

(13)
all Imposition Deposits;

(14)
all refunds or rebates of Impositions by any Governmental Authority or insurance company (other than refunds applicable to periods before the real property tax year in which this Security Instrument is dated);

(15)
any security deposits under any Lease;

(16)
all names under or by which any of the above Mortgaged Property may be operated or known, and all trademarks, trade names, and goodwill relating to any of the Mortgaged Property;

(17)
all deposits and/or escrows held by or on behalf of Lender under Ancillary Agreements;

(18)
all awards, payments, settlements or other compensation resulting from litigation involving the Project;

(19)
any and all licenses, bed authority, and/or certificates of need required to operate the Healthcare Facility and receive the benefits and reimbursements under a provider agreement with Medicaid, Medicare, any State or local programs, healthcare insurers or other assistance providers relied upon by HUD to insure this Security Instrument, to the extent allowed by law, and regardless of whether such rights and contracts are held by Borrower or an operator; and

(20)
all receipts, revenues, income and other moneys received by or on behalf of the Healthcare Facility, including all Accounts Receivable, all contributions, donations, gifts, grants, bequests, all revenues derived from the operation of the Healthcare Facility and all rights to receive the same, whether in the form of Accounts Receivable, contract rights, chattel paper, instruments or other rights whether now owned or held or later acquired by or in connection with the operation of the Healthcare Facility.

“ Non-Profit Borrower ” means a Borrower that is treated under the firm commitment as a

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corporation or association organized for purposes other than profit or gain for itself or persons identified therewith, pursuant to Section 501(c)(3) or other applicable provisions of the Internal Revenue Code.

“ Note ” means the Note executed by Borrower evidencing the Loan described in this Security Instrument, including all schedules, riders, allonges and addenda, as such Note may be amended from time to time.

“ Notice ” means all notices, demands and other communications under or concerning any of the Loan Documents.

“ Nursing Home ” means a public facility, proprietary facility, or facility of a private nonprofit corporation or association, licensed or regulated by the State (or, if there is no State law providing for such licensing and regulation by the State, by the municipality or other political subdivision in which the facility is located), for the accommodation of convalescents or other persons who are not acutely ill and not in need of hospital care but who require skilled nursing care and related medical services, in which such nursing care and medical services are prescribed by, or are performed under the general direction of, persons licensed to provide such care or services in accordance with the laws of the State where the facility is located.

“ Operator ” means, except as otherwise approved by HUD, (i) any single asset entity acceptable to HUD that operates the Healthcare Facility, pursuant to a lease, management agreement, operating agreement, or similar contract with the Borrower, or if the Healthcare Facility is aggregated with other health care facilities in connection with a master lease, with the Master Tenant, or (ii) the Borrower in those circumstances in which the Borrower is directly operating the Healthcare Facility. Where the Project has more than one licensed operator, the use of the singular shall include the plural.
 
“ Operator Lease ” means a lease by Borrower Master Tenant to Operator providing for the operation of the Healthcare Facility.

“ Operator’s Regulatory Agreement ” means that certain Healthcare Regulatory Agreement - Operator, relating to the Project and entered into by Operator for the benefit of HUD.

“ Operator’s Security Agreement ” means that certain Operator Security Agreement relating to the Project, and made by Operator.

“ Personalty ” means all equipment, inventory, and general intangibles associated with the Healthcare Facility and/or the Project. It includes furniture, furnishings, beds, machinery, building materials, appliances, goods, supplies, tools, books, records (whether in written or electronic form), computer equipment (hardware and software) and other tangible or electronically stored personal property (other than Fixtures) that are owned, leased or used now or in the future in connection with

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the ownership, management or operation of the Healthcare Facility and/or any other portion of the Project, or are located on the Land or in the Improvements, and any operating agreements relating to the Project, and any surveys, plans and specifications and contracts for architectural, engineering and construction services relating to the Project, and all other intangible property and rights relating to the operation of, or used in connection with, the Project, including all certifications, approvals and governmental permits relating to any activities on the Land. Personalty includes all tangible and intangible personal property used in connection with the Healthcare Facility (such as major movable equipment and systems), accounts, licenses, bed authorities, certificates of need required to operate the Healthcare Facility and to receive benefits and reimbursements under provider agreements with Medicaid, Medicare, State and local programs, payments from healthcare insurers and any other assistance providers; all certifications, permits and approvals, instruments, Rents, lease and contract rights, and equipment leases relating to the use, operation, maintenance, repair and improvement of the Healthcare Facility. Generally, intangibles shall also include all cash and cash escrow funds, such as but not limited to: reserve for replacement accounts, debt service reserve accounts, bank accounts, Residual Receipts accounts, and investments.

“ Principal ” is defined in 24 C.F.R. 200.215, or any successor regulation.

“ Program Obligations ” means (1) all applicable statutes and any regulations issued by HUD pursuant thereto that apply to the Project, including all amendments to such statutes and regulations, as they become effective, except that changes subject to notice and comment rulemaking shall become effective only upon completion of the rulemaking process, and (2) all current requirements in HUD handbooks and guides, notices, and mortgagee letters that apply to the Project, and all future updates, changes and amendments thereto, as they become effective, except that changes subject to notice and comment rulemaking shall become effective only upon completion of the rulemaking process, and provided that such future updates, changes and amendments shall be applicable to the Project only to the extent that they interpret, clarify and implement terms in this Security Instrument rather than add or delete provisions from such document. Handbooks, guides, notices, and mortgagee letters are available on HUD’s official website: http://www.hud.gov/offices/adm/hudclips/index.cfm, or a successor location to that site.

“ Project ” means any and all assets of whatever nature or wherever situated related to the Loan, including without limitation, the Mortgaged Property, any Improvements, and any collateral owned by the Operator securing the Loan.

“ Property Jurisdiction ” means any applicable jurisdiction in which the Land is located.

“ Reasonable Operating Expenses ” means expenses that arise from the operation, maintenance and routine repair of the Project, including all payments and deposits required under this Security Instrument and any Loan Document, and comply with the requirements of 24 C.F.R. 232.1007, or successor regulation.


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“ Rent ” means all rent due pursuant to any Master Lease or Operator Lease, any payments due pursuant to any Residential Agreement, any other lease payments, revenues, charges, fees and assistance payments arising from the operation of the Project, including but not limited to, if and for so long as applicable, workers’ compensation, social security, Medicare, Medicaid, and other third-party reimbursement payments, Accounts Receivable and all payments and income arising from the operation of the Healthcare Facility and/or the provision of services to residents thereof.

“ Residential Agreement ” means any lease or other agreement between the Operator and a resident setting forth the terms of the resident’s living arrangements and the provision of any related services.

“ Residual Receipts ” means certain funds held by a Non-Profit Borrower which are restricted in their use by Program Obligations.

“ State ” means the state of the Property Jurisdiction and may include any of the fifty states of the United States of America, Puerto Rico, the District of Columbia, Guam, the Trust Territory of the Pacific Islands, the American Samoa, and the Virgin Islands.

“ Surplus Cash ” means any Borrower’s cash remaining in Project-related accounts at the close of business on the last day of the Project’s semi-annual fiscal period, as further described in Program Obligations.

“ Taxes ” means all taxes, assessments, vault rentals and other charges, if any, general, special or otherwise, including all assessments for schools, public betterments and general or local improvements, which are levied, assessed or imposed by any public authority or quasi-public authority, and which, if not paid, could become a lien on the Land or the Improvements.

“ Waste ” means a failure to keep the Project in decent, safe and sanitary condition and in good repair. Waste also means the failure to meet certain financial obligations regarding the payment of Taxes and the relinquishment of the possession of Rents. During any period in which HUD insures the Loan or holds a security interest on the Mortgaged Property, Waste is committed when, without Lender’s and HUD’s express written consent, Borrower:

(1)
physically changes, or permits changes to, the Mortgaged Property, whether negligently or intentionally, in a manner that reduces its value;

(2)
fails to maintain the Mortgaged Property in decent, safe, and sanitary condition and in good repair;

(3)
fails to pay, or cause to be paid, before delinquency any Taxes secured by a lien having priority over this Security Instrument;

(4)
materially fails to comply with covenants in the Note, this Security Instrument, Borrower’s Regulatory Agreement, or any Loan Document,

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respecting physical care, maintenance, construction, abandonment, demolition, or insurance against casualty of the Mortgaged Property; or

(5)
retains possession of Rents to which Lender or its assigns have the right of possession under the terms of the Loan Documents.

“ UCC Collateral ” means any Mortgaged Property which, under applicable law, may be subject to a security interest under the UCC, whether acquired now or in the future, and all products and cash proceeds and non-cash proceeds thereof.

2. UNIFORM COMMERCIAL CODE SECURITY AGREEMENT.

(a) This Security Instrument is also a security agreement under the Uniform Commercial Code (“ UCC ”) for any of the Mortgaged Property which is UCC Collateral, and Borrower hereby grants to Lender a security interest in the UCC Collateral. Borrower hereby authorizes Lender to file financing statements, continuation statements and amendments, including any deposit account control agreements or similar agreements, in such form as Lender may require to perfect or continue the perfection of this security interest. Borrower agrees to enter into any agreements, in form as Lender may require, that the UCC requires to perfect and continue perfection of Lender’s security interest in the portion of UCC Collateral that requires Lender control to attain such perfection. Borrower shall pay all filing costs and all costs and expenses of any record searches for financing statements that Lender may require. Without the prior written consent of Lender and HUD, Borrower shall not create or permit to exist any other lien or security interest in any of the UCC Collateral. Borrower represents and warrants to Lender that, except for UCC filings disclosed to Lender and HUD that are to be released in connection with the closing of the Loan or otherwise consented to in writing by Lender and HUD, no UCC filings have been made against Borrower, the UCC Collateral, the Mortgaged Property, or the Project prior to the initial or initial/final endorsement of the Note by HUD, and Borrower has taken and shall take no action that would give rise to such UCC filings, except for any UCC filings in connection with the acquisition of any Personalty that has been approved in writing by HUD. Borrower also represents and warrants to Lender that, except in connection with any Accounts Receivable financing as approved by Lender and HUD or as otherwise permitted by Lender and HUD, Borrower has not entered into, and will not enter into, nor has it permitted nor will it permit, Operator or Master Tenant or any management agent, as applicable, to enter into any agreement with any party other than Lender in conjunction with the present Loan transaction that allows for the perfection of a security interest in any portion of the UCC Collateral. Borrower will promptly notify Lender of any change in its business or principal location, name, or other organizational change that would require a filing under the UCC to continue perfection of Lender’s interest, and hereby authorizes Lender to file, and will assist Lender in filing, any forms necessary to continue the effectiveness of existing financing statements or for perfection of Lender’s security interest. If an Event of Default has occurred and is continuing, Lender shall have the remedies of a secured party under the UCC, in addition to all remedies provided by this Security Instrument or existing under applicable law. In exercising any remedies, Lender may

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exercise its remedies against the UCC Collateral separately or together, and in any order, without in any way affecting the availability of Lender’s other remedies. This Security Instrument constitutes a fixture filing financing statement with respect to any part of the Mortgaged Property which is or may become a Fixture and which shall be filed in the local real estate records.

(b) In addition, to the extent the UCC Collateral may exclude any of the Mortgaged Property, Borrower hereby grants to Lender a security interest in any and all of the present or hereafter acquired Mortgaged Property, and all products, cash proceeds and non-cash proceeds thereof.

(c) The Borrower acknowledges and agrees that, in applying the law of any jurisdiction that at any time enacts all or substantially all of the uniform provisions of Revised Article 9 of the UCC (1999 Official Text, as amended), the definition of Mortgaged Property and the above collateral description covers all assets of Borrower.

3. CONTROL OF DEPOSIT ACCOUNTS. As part of the consideration for the Indebtedness, Borrower has executed, or has caused Operator or Master Tenant to execute, one or more deposit account control agreements or similar agreements in a form approved by Lender and HUD, pursuant to which Borrower, Master Tenant, or Operator, as applicable, acknowledges Lender as a secured party, and grants to Lender control (as defined in Section 9-104 of the UCC) of one or more deposit accounts of the Project and all cash, moneys and other property on deposit from time to time therein. Lender shall exercise such control in accordance with such deposit account control agreements or similar agreements, and Borrower shall continue to execute or cause to be executed such deposit account control agreements or similar agreements with respect to the Project’s accounts as required by Lender and HUD.

4. ASSIGNMENT OF LEASES; LEASES AFFECTING THE MORTGAGED PROPERTY.

(a) As part of the consideration for the Indebtedness, Borrower absolutely and unconditionally assigns and transfers to Lender all of Borrower’s rights, title and interest in, to and under the Leases, including Borrower’s right, power and authority to modify the terms of any such Lease, or extend or terminate any such Lease. It is the intention of Borrower to establish a present, absolute and irrevocable transfer and assignment to Lender of all of Borrower’s right, title and interest in, to and under the Leases. Borrower and Lender intend this assignment of the Leases to be immediately effective and to constitute an absolute present assignment and not an assignment for additional security only. For purposes of giving effect to this absolute assignment of the Leases, and for no other purpose, the Leases shall not be deemed to be a part of the Mortgaged Property. However, if this present, absolute and unconditional assignment of Leases is not enforceable by its terms under the laws of the Property Jurisdiction, then the Leases shall be included as a part of the Mortgaged Property and it is the intention of Borrower that in this circumstance this Security

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Instrument create and perfect a lien on the Leases in favor of Lender, which lien shall be effective as of the date of this Security Instrument.

(b) Until Lender gives Notice to Borrower of Lender’s exercise of its rights under this Section 4, Borrower shall have all rights, power and authority granted to Borrower under any Lease (except as otherwise limited by this Section or any other provision of this Security Instrument), including the right, power and authority to modify the terms of any Lease or extend or terminate any Lease as such rights are limited or affected by the terms of the Loan Documents and Program Obligations. Upon the occurrence of an Event of Default and throughout its continuation, the permission given to Borrower pursuant to the preceding sentence to exercise its rights, power and authority under Leases shall automatically terminate. Should such Event of Default be subsequently cured, the Borrower’s aforesaid permission shall be reinstated. Borrower shall comply with and observe Borrower’s obligations under all Leases, including Borrower’s obligations, if any, pertaining to the maintenance and disposition of security deposits.

(c) Borrower acknowledges and agrees that the exercise by Lender, either directly or by its designee, of any of the rights conferred under this Section 4 shall not be construed to make Lender a lender-in-possession of the Mortgaged Property so long as Lender, or an authorized agent of Lender, has not entered into actual possession of the Land and the Improvements. The acceptance by Lender of the assignment of the Leases pursuant to Section 4(a) shall not at any time or in any event obligate Lender to take any action under this Security Instrument or to expend any money or to incur any expenses. Lender shall not be liable in any way for any injury or damage to person or property sustained by any person or persons, firm or corporation in or about the Mortgaged Property unless Lender is a lender-in-possession. Prior to Lender’s actual entry into and taking possession of the Mortgaged Property, Lender shall not (1) be obligated to perform any of the terms, covenants and conditions contained in any Lease (or otherwise have any obligation with respect to any Lease); (2) be obligated to appear in or defend any action or proceeding relating to the Lease or the Mortgaged Property; or (3) be responsible for the operation, control, care, management or repair of the Mortgaged Property or any portion of the Mortgaged Property. The execution of this Security Instrument by Borrower shall constitute conclusive evidence that all responsibility for the operation, control, care, management and repair of the Mortgaged Property is and shall be that of Borrower, prior to such actual entry and taking of possession.

(d) Upon delivery of Notice by Lender to Borrower of Lender’s exercise of Lender’s rights under this Section 4 at any time after the occurrence of an Event of Default, and without the necessity of Lender entering upon and taking and maintaining control of the Mortgaged Property directly, by a receiver, or by any other manner or proceeding permitted by the laws of the Property Jurisdiction, Lender immediately shall have all rights, powers and authority granted to Borrower under any Lease, including the right, power and authority to modify the terms of any such Lease, or extend or terminate any such Lease.


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(e) Borrower shall not receive or accept, nor permit Operator to receive or accept, Rent under any Lease (whether residential or non-residential) for more than two months in advance.

5. PAYMENT OF INDEBTEDNESS; PERFORMANCE UNDER THE LOAN DOCUMENTS; PREPAYMENT PREMIUM. Borrower shall pay the Indebtedness when due in accordance with the terms of the Note and this Security Instrument and shall perform, observe and comply with all other provisions of the Note and this Security Instrument. Borrower shall pay a prepayment premium in connection with certain prepayments of the Indebtedness, including a payment made after Lender’s exercise of any right of acceleration of the Indebtedness, as provided in the Note.

6. EXCULPATION. Except for personal liability expressly provided for in this Security Instrument or in the Note or in the Borrower’s Regulatory Agreement, the execution of the Note shall impose no personal liability upon Borrower and ADCARE HEALTH SYSTEMS, INC., a Georgia corporation, or for payment of the Indebtedness evidenced thereby and in the Event of Default, the holder of the Note shall look solely to the Mortgaged Property in satisfaction of the Indebtedness and will not seek or obtain any deficiency or personal judgment against Borrower and ADCARE HEALTH SYSTEMS, INC., a Georgia corporation, except such judgment or decree as may be necessary to foreclose or bar its interest in the Mortgaged Property and all other property mortgaged, pledged, conveyed or assigned to secure payment of the Indebtedness; provided, that nothing in this Section 6 of this Security Instrument and no action so taken shall operate to impair any obligation of Borrower under the Borrower’s Regulatory Agreement.

7. DEPOSITS FOR TAXES, INSURANCE AND OTHER CHARGES.

(a) Borrower shall pay to and deposit with Lender, or shall cause Operator to pay or deposit with Lender, together with and in addition to the monthly payments of interest or of principal and interest payable under the terms of the Note on the first day of each month after the commencement of amortization under the Note, and continuing until the debt secured hereby is paid in full, the following sums:

(1)
an amount sufficient to provide Lender with funds to pay the next mortgage insurance premium if this Security Instrument and the Note are insured by HUD, or a monthly service charge, if they are held by HUD, as follows:

(i)
If and so long as the Note is insured under the provisions of the National Housing Act, as amended, an amount sufficient to accumulate in the hands of Lender one month prior to its due date the annual mortgage insurance premium; or


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(ii)
If and so long as the Note and this Security Instrument are held by HUD, a monthly service charge in an amount equal to the lesser of the amount permitted by law or the amount set forth in Program Obligations computed for each successive year beginning with the first day of the month following the date of this Security Instrument, or the first day of the month following assignment, if the Note and this Security Instrument are assigned to HUD without taking into account delinquencies or prepayment; and

(2)
a sum equal to the ground rents, if any, next due, plus the premiums that will next become due and payable on policies of fire and other property insurance covering the premises covered hereby, plus water rates, Taxes, municipal/government utility charges and special assessments next due on the premises covered hereby (all as estimated by Lender) less all sums already paid therefore divided by the number of months to the date when such ground rents, premiums, water rates, Taxes, municipal/utility charges and special assessments will become delinquent, such sums to be held by Lender in trust to pay said ground rents, premiums, water rates, Taxes, and special assessments;

(3)
provided that, all payments and deposits mentioned in the two preceding subsections of this Section and all payments to be made under the Note shall be added together and the aggregate amount thereof shall be paid each month in a single payment or deposit to be applied by Lender to the following items in the order set forth:

(i)
mortgage insurance premium charges under the Contract of Insurance;

(ii)
ground rents, if Lender has required them to be escrowed with Lender, Taxes, special assessments, water rates, municipal/government utility charges, fire and other property insurance premiums;

(iii)
interest on the Note; and

(iv)
amortization of the principal of the Note.

(b) Borrower shall pay to and deposit, or shall cause Operator to pay or deposit, with Lender all other escrows and deposits, including any reserves for replacements.

(c) Borrower shall deposit with Lender any other amounts as may be required by any Ancillary Agreement and shall perform all other obligations of Borrower under each Ancillary

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Agreement. Ancillary Agreement deposits shall be held in an institution (which may be Lender, if Lender is such an institution) whose deposits or accounts are insured or guaranteed by a federal agency and in accordance with Program Obligations.

8. IMPOSITION DEPOSITS.

(a) In the event Borrower or Operator fails to pay any sums provided for in this Security Instrument, Lender, at its option, may pay the same. Any excess funds accumulated under Section 7(a) remaining after payment of the items therein mentioned, shall be credited to subsequent monthly payments of the same nature required thereunder; but if any such item shall exceed the estimate therefore, or if Borrower or Operator shall fail to pay any other governmental or municipal charge, Borrower shall forthwith, or shall cause Operator to forthwith, make good the deficiency or pay the charge before the same become delinquent or subject to interest or penalties and in default thereof Lender may pay the same. All sums paid or advanced by Lender and any sums which Lender may be required to advance to pay mortgage insurance premiums shall be added to the Indebtedness and shall bear interest from the date of payment at the rate specified in the Note and shall be due and payable on demand. In case of termination of the Contract of Insurance by prepayment of the Indebtedness in full or otherwise (except as hereinafter provided), accumulations under Section 7(a) not required to pay sums due under Section 7(a)(3) shall be credited to Borrower. If the Mortgaged Property is sold under foreclosure or is otherwise acquired by Lender after an Event of Default, any remaining balance of the accumulations under Section 7(a) shall be credited to the principal under the Note as of the date of the commencement of foreclosure proceedings or as of the date the Mortgaged Property is otherwise acquired; and accumulations under Section 7 shall be likewise credited unless required to pay sums due HUD under Section 7(a)(3). The amounts deposited under Section 7 and Section 8 are collectively referred to in this Security Instrument as the “ Imposition Deposits ”. The obligations of Borrower for which the Imposition Deposits are required are collectively referred to in this Security Instrument as “ Impositions ”. The amount of the Imposition Deposits shall be sufficient to enable Lender to pay applicable Impositions before the last date upon which such payment may be made without any penalty or interest charge being added. Lender shall maintain records indicating how much of the monthly Imposition Deposits and how much of the aggregate Imposition Deposits held by Lender are held for the purpose of paying Taxes, insurance premiums and each other obligation of Borrower for which Imposition Deposits are required. Any waiver by Lender of the requirement that Borrower remit Imposition Deposits to Lender may be revoked by Lender, in Lender’s discretion, at any time upon Notice to Borrower.

(b) Imposition Deposits shall be held in accounts insured or guaranteed by a federal agency and in accordance with Program Obligations. Lender shall apply the Imposition Deposits to pay Impositions so long as no Event of Default has occurred and is continuing. Unless required by Program Obligations, Lender shall not be required to pay Borrower any interest, earnings or profits on the Imposition Deposits with the exception of the reserve for replacements account or Residual Receipts account (if any). Borrower hereby pledges and grants to Lender a security interest in the Imposition Deposits as additional security for all of Borrower’s obligations under this Security

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Instrument and the Note. Any amounts deposited with Lender under Section 7 shall not be trust funds, nor shall they operate to reduce the Indebtedness.

(c) If Lender receives a bill or invoice for an Imposition, Lender shall pay the Imposition from the Imposition Deposits held by Lender. Lender shall have no obligation to pay any Imposition to the extent it exceeds Imposition Deposits then held by Lender. Lender may pay an Imposition according to any bill, statement or estimate from the appropriate public office or insurance company without inquiring into the accuracy of the bill, statement or estimate or into the validity of the Imposition.

(d) If at any time the amount of the Imposition Deposits held by Lender (other than the reserves for replacements or Residual Receipts, if any) for payment of a specific Imposition exceeds the amount reasonably deemed necessary by Lender plus one-sixth of such estimate, the excess shall be credited against future installments of Imposition Deposits. If at any time the amount of the Imposition Deposits held by Lender for payment of a specific Imposition is less than the amount reasonably estimated by Lender to be necessary plus one-sixth of such estimate, Borrower shall pay to Lender the amount of the deficiency within fifteen (15) days after Notice from Lender.

9. REGULATORY AGREEMENT.

(a) Borrower and HUD have executed the Borrower’s Regulatory Agreement, which is incorporated in and made a part of this Security Instrument. In addition, and without limiting the generality of the foregoing, Borrower will deliver to Lender copies of all reports, financial statements and other information which the Borrower is obligated to provide to HUD pursuant to the Borrower’s Regulatory Agreement or otherwise pursuant to the Loan Documents or Program Obligations, not later than the earlier of (i) the date such reports, financial statements or other information are required to be delivered to HUD or (ii) ten (10) days after the Lender or HUD make a request for a report, financial statement or other information. Upon an Event of Default under the Borrower’s Regulatory Agreement and upon the request of HUD, Lender, at its option, may declare an Event of Default of this Security Instrument.

(b) Borrower shall require Operator to comply with the terms of the Operator’s Regulatory Agreement and shall set forth such requirements, or cause such requirements to be set forth, in any Borrower-Operator Agreement. Borrower shall require Master Tenant to comply with the terms of the Master Tenant’s Regulatory Agreement and shall set forth such requirements in any Master Lease.

10. APPLICATION OF PAYMENTS. If at any time Lender receives, from Borrower or otherwise, any amount applicable to the Indebtedness which is less than all amounts due and payable at such time, Lender must apply that payment to amounts then due and payable in the manner and in the order set forth in Section 7(a)(3). Neither Lender’s acceptance of an amount that is less than all amounts then due and payable nor Lender’s application of such payment in the manner

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authorized shall constitute or be deemed to constitute either a waiver of the unpaid amounts or an accord and satisfaction. Notwithstanding the application of any such amount to the Indebtedness, Borrower’s obligations under this Security Instrument and the Note shall remain unchanged.

11. COMPLIANCE WITH LAWS. Borrower shall comply with all applicable: laws; ordinances; regulations; requirements of any Governmental Authority; lawful covenants and agreements recorded against the Mortgaged Property; so long as the Loan is insured or held by HUD, the Borrower’s Regulatory Agreement, and Program Obligations including lead-based paint maintenance requirements of 24 C.F.R. Part 35, subpart G, and any successor regulations; including but not limited to those of the foregoing pertaining to: health and safety; construction of Improvements on the Mortgaged Property; fair housing; civil rights; zoning and land use; Leases; and maintenance and disposition of security deposits; and, with respect to all of the foregoing, all subsequent amendments, revisions, promulgations or enactments. Borrower shall at all times maintain records sufficient to demonstrate compliance with the provisions of this Section 11. Borrower shall take appropriate measures to prevent, and shall not engage in or knowingly permit, any illegal activities at the Mortgaged Property, including those that could endanger residents or visitors, result in damage to the Mortgaged Property, result in forfeiture of the Mortgaged Property, or otherwise impair the lien created by this Security Instrument or Lender’s interest in the Mortgaged Property. Borrower represents and warrants to Lender that no portion of the Mortgaged Property has been or will be purchased with the proceeds of any illegal activity.

12. USE OF PROPERTY. Unless permitted by applicable law and approved by Lender, Borrower shall not (a) allow changes in the use for which all or any part of the Mortgaged Property is being used at the time this Security Instrument was executed, (b) convert any individual dwelling units or common areas to commercial use, (c) initiate or acquiesce in a change in the zoning classification of the Mortgaged Property that results in any change in permitted use that was in effect at the time of initial/final endorsement, (d) establish any condominium or cooperative regime with respect to the Mortgaged Property, (e) materially change any unit configurations or change the number of units in the Mortgaged Property, (f) combine all or any part of the Mortgaged Property with all or any part of a tax parcel which is not part of the Mortgaged Property, (g) subdivide or otherwise split any tax parcel constituting all or any part of the Mortgaged Property, or (h) so long as the Note is insured or held by HUD, permit the Mortgaged Property to be used as transient housing or as a hotel in violation of Section 513 of the National Housing Act, as amended.

13. PROTECTION OF LENDER’S SECURITY.

(a) If Borrower fails to perform any of its obligations under this Security Instrument, Note or Borrower’s Regulatory Agreement, or if any action or proceeding is commenced which purports to affect the Mortgaged Property, Lender’s security or Lender’s rights under this Security Instrument, including eminent domain, insolvency, Waste, code enforcement, civil or criminal

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forfeiture, enforcement of Hazardous Materials Laws, fraudulent conveyance or reorganizations or proceedings involving a bankrupt or decedent, then Lender at Lender’s option may make such appearances, advance such sums and take such actions as Lender reasonably deems necessary to perform such obligations of Borrower and to protect Lender’s interest, including (1) payment of fees and out-of-pocket expenses of attorneys (including fees for litigation at all levels), accountants, inspectors and consultants, (2) entry upon the Mortgaged Property to make repairs or secure the Mortgaged Property, (3) procurement of the insurance required by Section 19, and (4) payment of amounts which Borrower has failed to pay under Section 16 or any other Section of this Security Instrument.

(b) Any amounts advanced by Lender for taxes, special assessments, water rates, which are liens prior to this Security Instrument, insuring the Project and mortgage insurance premiums, paid after an Event of Default, shall be added to, and become part of the Indebtedness, and shall be immediately due and payable and shall bear interest from the date of the advance until paid at the interest rate specified in the Note. So long as the Loan is insured or held by HUD, Lender does not have any obligation to make advances except as required under Program Obligations, and any advance by Lender other than as required by Program Obligations requires prior HUD approval before such advance can be added to the Indebtedness.

(c) Nothing in Section 13 shall require Lender to incur any expense or take any action to protect its security.

14. INSPECTION. Upon reasonable notice, Lender and/or HUD, and/or the agents, representatives, and designees of either, may make or cause to be made entries upon and inspections of the Mortgaged Property (including any environmental inspections and tests) during normal business hours, or at any other reasonable time.

15. BOOKS AND RECORDS; FINANCIAL REPORTING. Borrower shall comply with the books, records, and reporting requirements of the Borrower’s Regulatory Agreement.

16. TAXES; OPERATING EXPENSES.

(a) Subject to the provisions of Section 16(c) and Section 16(d), Borrower shall pay, or cause to be paid, all Taxes when due and before the addition of any interest, fine, penalty or cost for nonpayment.

(b) Subject to the provisions of Section 16(c), Borrower shall pay, or cause to be paid, the expenses of operating, managing, maintaining and repairing the Mortgaged Property (including insurance premiums, utilities, repairs and replacements) before the last date upon which each such payment may be made without any penalty or interest charge being added.

(c) As long as no Event of Default exists and Borrower has timely delivered to Lender

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any bills or premium notice that it has received, Borrower shall not be obligated to pay Taxes, insurance premiums or any other individual Imposition to the extent that sufficient Imposition Deposits are held by Lender for the purpose of paying that specific Imposition. If an Event of Default exists, Lender may exercise any rights Lender may have with respect to Imposition Deposits without regard to whether Impositions are then due and payable; provided that so long as the Loan is insured by HUD, Lender’s exercise of its rights shall be subject to Program Obligations pertaining to claims for mortgage insurance benefits. Lender shall have no liability to Borrower for failing to pay any Impositions to the extent that any Event of Default has occurred and is continuing, insufficient Imposition Deposits are held by Lender at the time an Imposition becomes due and payable or Borrower has failed to provide Lender with bills and premium notice as provided above.

(d) Borrower, at its own expense, and, so long as the Loan is insured or held by HUD, in accordance with the Borrower’s Regulatory Agreement, may contest by appropriate legal proceedings, conducted diligently and in good faith, the amount or validity of any Imposition other than insurance premiums, if (1) Borrower notifies Lender of the commencement or expected commencement of such proceedings, (2) the Mortgaged Property is not in danger of being sold or forfeited, (3) Borrower deposits, or causes Operator to deposit, with Lender reserves sufficient to pay the contested Imposition, if requested by Lender, and (4) Borrower furnishes whatever additional security is required in the proceedings or is reasonably requested by Lender, which may include the delivery to Lender of the reserves established by Borrower to pay the contested Imposition.

(e) Borrower shall promptly deliver to Lender a copy of all Notices of, and invoices for, Impositions, and if Borrower pays any Imposition directly, Borrower shall promptly furnish to Lender receipts evidencing such payments.

17. LIENS; ENCUMBRANCES.

(a) Borrower shall not permit the grant, creation or existence of any mortgage, deed of trust, deed to secure debt, security deed, security interest or other lien or encumbrance (“ Lien ”) on the Mortgaged Property (other than the lien of this Security Instrument, any tax liens which are imposed before payment is due, or any subordinate liens which are approved by HUD and Lender), whether voluntary, involuntary or by operation of law, and whether or not such Lien has priority over the lien of this Security Instrument.

(b) Borrower shall not repay any HUD-approved subordinate Lien from proceeds of the Loan other than from Surplus Cash or Residual Receipts (as both terms are defined in the Borrower’s Regulatory Agreement), except in the case of a subordinate Lien created in connection with an operating loss loan insured pursuant to Section 223(d) of the National Housing Act or a supplement loan insured pursuant to Section 241 of the National Housing Act.

18. PRESERVATION, MANAGEMENT AND MAINTENANCE OF THE

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MORTGAGED PROPERTY. Borrower (a) shall not commit Waste, (b) shall not abandon the Mortgaged Property, (c) shall restore or repair promptly, in a good and workmanlike manner, any damaged part of the Mortgaged Property to the equivalent of its original condition, or such other condition as Lender may approve in writing, whether or not litigation or insurance proceeds or condemnation awards are available to cover any costs of such restoration or repair, (d) shall keep the Mortgaged Property in decent, safe, and sanitary condition and good repair, including the replacement of Personalty and Fixtures with items of equal or better function and quality, all in accordance with Program Obligations, (e) shall provide for qualified management of the Mortgaged Property by a licensed or otherwise qualified entity consistent with Program Obligations and/or any governmental requirements pertaining to operation and licensure, (f) shall give Notice to Lender of and, unless otherwise directed in writing by Lender, shall appear in and defend, any action or proceeding that could impair the Mortgaged Property, Lender’s security or Lender’s rights under this Security Instrument, (g) shall not (and shall not permit any Operator, resident or other person to) remove, demolish or alter the Mortgaged Property or any part of the Mortgaged Property except that Borrower may dispose of obsolete or deteriorated Fixtures or Personalty if the same are replaced with like items of the same or greater quality or value, or make minor alterations which do not impair the Mortgaged Property, and (h) so long as the Loan is insured or held by HUD, shall not expend any Project funds except for Reasonable Operating Expenses and necessary repairs and except as permitted by Program Obligations and the Borrower’s Regulatory Agreement, without the prior written approval of HUD. Borrower shall cause any operator, master tenant, management agent, as applicable, to comply with the foregoing provisions (a) through (h). So long as the Loan is insured or held by HUD, all expenses incurred by Borrower in connection with the Mortgaged Property shall be incurred in compliance with Program Obligations.

19. PROPERTY AND LIABILITY INSURANCE.

(a) Borrower shall keep the Mortgaged Property insured at all times to the full extent of Program Obligations, as they may be amended from time to time. Further, Borrower shall keep the Mortgaged Property insured at all times against such hazards as Lender may from time to time require, which insurance shall include but not be limited to coverage against loss by fire and allied perils, general boiler and machinery coverage, builders all-risk and business income coverage. Lender’s insurance requirements may change from time to time throughout the term of the Indebtedness. If Lender so requires, such insurance shall also include sinkhole insurance, mine subsidence insurance, earthquake insurance, and, if the Mortgaged Property does not conform to applicable zoning or land use laws, building ordinance or law coverage. If any of the Improvements are located in an area identified by the Federal Emergency Management Agency (or any successor to that agency) as an area having special flood hazards, Borrower shall maintain flood insurance covering the applicable Improvements in an amount at least equal to its development or project cost (less estimated land cost) or to the maximum limit of coverage made available with respect to the particular type of property under the National Flood Insurance Act of 1968, as amended, or its successor statute, whichever is less, provided that the amount of flood insurance need not exceed the outstanding principal balance of the Note, and flood insurance need not be maintained beyond

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the term of the Note. If Lender determines that flood insurance has not been obtained in the required amount, Lender must notify Borrower of Borrower’s obligations to obtain the proper flood insurance. If Borrower does not obtain such insurance within forty-five (45) days of the date of this notification, Lender shall purchase such flood insurance on behalf of Borrower and may charge Borrower for the cost of premiums and fees incurred by Lender in purchasing the flood insurance.

(b) All premiums on insurance policies required under Section 19(a) shall be paid in the manner provided in Section 7, unless Lender has designated in writing another method of payment. All such policies shall also be in a form approved by Lender. All policies of property damage insurance shall include a non-contributing, non-reporting mortgage clause in a form approved by Lender, and in favor of Lender (and HUD, as their interests appear) and shall name as loss payee Lender, its successors and assigns. Lender shall have the right to hold the original policies or duplicate original policies of all insurance required by Section 19(a). Borrower shall promptly deliver to Lender a copy of all renewal and other notices received by Borrower with respect to the policies and all receipts for paid premiums. At least thirty (30) days prior to the expiration date of a policy, Borrower shall deliver to Lender evidence of continuing coverage in form satisfactory to Lender.

(c) Borrower shall maintain, or shall cause Operator to maintain, at all times commercial general and professional liability insurance, workers’ compensation insurance and such other liability, errors and omissions and fidelity insurance coverages to the full extent of Program Obligations, as may be amended from time to time. Further, Borrower shall maintain, or shall cause Operator to maintain, at all times such coverages as Lender may from time to time require, or shall require any appropriate party to maintain at all times commercial general liability insurance, workers’ compensation insurance and such other liability, errors and omissions and fidelity insurance coverages as Lender may from time to time require or such other insurance coverage as required by Program Obligations.

(d) All insurance policies and renewals of insurance policies required by this Section 19 shall be in such amounts and for such periods as Lender may from time to time require, and shall be issued by insurance companies satisfactory to Lender and in accordance with Program Obligations. Lender shall have the right to effect insurance in the event Borrower fails to comply with this Section.

(e) Borrower shall comply with all insurance requirements and shall not permit any condition to exist on the Mortgaged Property that would invalidate any part of any insurance coverage that this Security Instrument requires Borrower to maintain.

(f) In the event of loss, Borrower shall give immediate written Notice to the insurance carrier and to Lender. Borrower hereby authorizes and appoints Lender as attorney-in-fact for Borrower to make proof of loss, to adjust and compromise any claims under policies of property damage insurance, to appear in and prosecute any action arising from such property damage

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insurance policies, to collect and receive the proceeds of property damage insurance, and to deduct from such proceeds Lender’s expenses incurred in the collection of such proceeds. This power of attorney is coupled with an interest and therefore is irrevocable. Borrower shall notify Lender of any payment received from any insurer. Lender shall (1) hold the balance of such proceeds to be used to reimburse Borrower for the cost of restoring and repairing the Mortgaged Property to the equivalent of its original condition or to a condition approved by Lender, or (2) apply the balance of such proceeds to the payment of the Indebtedness, whether or not then due. To the extent Lender determines to apply insurance proceeds to restoration, Lender shall do so in accordance with Lender’s then-current policies relating to the restoration of casualty damage on similar healthcare properties; provided that so long as the Loan is insured or held by HUD, insurance proceeds shall be applied as approved by HUD and in accordance with Program Obligations pursuant to Section 19(g) below.

(g) Lender shall not exercise its option to apply insurance proceeds to the payment of the Indebtedness if all of the following conditions are met: (1) no Event of Default (or any event which, with the giving of Notice or the passage of time, or both, would constitute an Event of Default) has occurred and is continuing; (2) Lender determines, in its discretion, that there will be sufficient funds to complete the restoration; (3) Lender determines, in its discretion, that the rental income from the Mortgaged Property after completion of the restoration will be sufficient to meet all operating costs and other expenses, Imposition Deposits, deposits to reserves and loan repayment obligations relating to the Mortgaged Property; and (4) Lender determines, in its discretion, that the restoration will be completed before the earlier of (A) one year before the maturity date of the Note or (B) one year after the date of the loss or casualty. Further, so long as the Loan is insured by HUD, Lender may not exercise its option to apply insurance proceeds to the payment of the Indebtedness without the prior written approval of HUD. If HUD fails to give its approval to the use or application of such funds within sixty (60) days after the written request by Lender, Lender may use or apply such funds for any of the purposes specified herein without the approval of HUD.

(h) If the Mortgaged Property is sold at a foreclosure sale or Lender or HUD acquire title to the Mortgaged Property, Lender and HUD, as applicable, shall automatically succeed to all rights of Borrower in and to any insurance policies and unearned insurance premiums and in and to the proceeds of property damage insurance resulting from any damage to the Mortgaged Property prior to such sale or acquisition.

20. CONDEMNATION.

(a) Borrower shall promptly notify Lender of any action or proceeding relating to any condemnation or other taking, or conveyance in lieu thereof, of all or any part of the Mortgaged Property, whether direct or indirect condemnation. Borrower shall appear in and prosecute or defend any action or proceeding relating to any condemnation unless otherwise directed by Lender in writing. Borrower authorizes and appoints Lender as attorney-in-fact for Borrower to commence, appear in and prosecute, in Lender’s or Borrower’s name, any action or proceeding relating to any

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condemnation and to settle or compromise any claim in connection with any condemnation. This power of attorney is coupled with an interest and therefore is irrevocable. However, nothing contained in this Section 20 shall require Lender to incur any expense or take any action. Borrower hereby transfers and assigns to Lender all right, title and interest of Borrower in and to any award or payment with respect to (1) any condemnation, or any conveyance in lieu of condemnation, and (2) any damage to the Mortgaged Property caused by governmental action that does not result in a condemnation.

(b) All awards of compensation in connection with condemnation for public use of or a taking of any of the Mortgaged Property shall be paid to Lender to be applied (1) to fees, costs and expenses (including reasonable attorney’s fees) incurred by Lender; and (2) to the amount due under the Note secured hereby in (i) amounts equal to the next maturing installment or installments of principal and (ii) with any balance to be credited to the next payment due under the Note. After payment to Lender of all fees, costs and expenses (including reasonable attorney’s fees) incurred by Lender under this Section 20, all awards of damages in connection with any condemnation for public use of or damage to the Mortgaged Property, shall be paid to Lender to be applied to an account held for and on behalf of Borrower, which account shall, at the option of Lender, either be applied to the amount due under the Note as specified in the preceding sentence, or be disbursed for the restoration. No amount applied to the reduction of the principal amount due in accordance with this Section 20(b) shall be considered an optional prepayment as the term is used in this Security Instrument and the Note secured hereby, nor relieve Borrower from making regular monthly payments commencing on the first day of the first month following the date of receipt of the award. Lender is hereby authorized in the name of Borrower to execute and deliver necessary releases or approvals or to appeal from such awards.

21. TRANSFERS OF THE MORTGAGED PROPERTY OR INTERESTS IN BORROWER.

(a) So long as the Loan is insured or held by HUD, unless permitted by Program Obligations, Borrower shall not convey, assign, transfer, pledge, hypothecate, encumber or otherwise dispose of the Mortgaged Property or any interest therein or permit the conveyance, assignment or transfer of any interest in Borrower (if the effect of such conveyance, assignment or transfer is the creation or elimination of a Principal) unless permitted by Program Obligations. Borrower need not obtain the prior written approval of HUD for: (i) conveyance of the Mortgaged Property at a judicial or non-judicial foreclosure sale under this Security Instrument; (ii) inclusion of Mortgaged Property in a bankruptcy estate by operation of law under the United States Bankruptcy Code; (iii) acquisition of an interest by inheritance or by court decree, or (iv) other transfers permitted by Program Obligations.

(b) If the Loan is no longer insured or held by HUD, Borrower shall not convey, assign, transfer, pledge, hypothecate, encumber or otherwise dispose of the Mortgaged Property or any

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interest therein or permit the conveyance, assignment or transfer of any interest in Borrower without the prior written approval of Lender in its sole discretion.

22. EVENTS OF DEFAULT. The occurrence of any one or more of the following shall constitute either a “ Monetary Event of Default ” or a “ Covenant Event of Default ” under this Security Instrument:

(a) Monetary Event of Default: Any failure by Borrower to pay or deposit when due any amount required by the Note or Section 7(a) or (b) of this Security Instrument.

(b) Covenant Events of Default shall include:

(1)
fraud or material misrepresentation or material omission by Borrower, any of its officers, directors, trustees, general partners, members, managers or any guarantor in connection with (i) the Loan Application for or creation of the Indebtedness, (ii) any financial statements, or other report or information provided to Lender or any governmental entity during the term of the Indebtedness, or (iii) any request for Lender’s consent to any proposed action under this Security Instrument or the Note;

(2)
the commencement of a forfeiture action or proceeding, whether civil or criminal, which, in Lender’s reasonable judgment, could result in a forfeiture of the Mortgaged Property or otherwise materially impair the lien created by this Security Instrument or Lender’s interest in the Mortgaged Property;

(3)
any material failure by Borrower to perform or comply with any of its obligations under this Security Instrument (other than those otherwise specified in this Section 22), as and when required, which continues for a period of thirty (30) calendar days after Notice of such failure by Lender to Borrower, Lender shall extend such 30-day period by such time as Lender reasonably determines is necessary to correct the failure for so long as Lender determines, in its discretion, that: (i) Borrower is timely satisfying all payment obligations in the Loan Documents; (ii) none of the Permits and Approvals is at substantial and imminent risk of being terminated; (iii) such failure cannot reasonably be corrected during such 30-day period, but can reasonably be corrected in a timely manner, and (iv) Borrower commences to correct such failure, or cause such correction to be commenced, during such 30-day period and thereafter diligently and continuously proceeds to correct, or cause correction of, such failure. However, no such Notice shall apply in the case of any such material failure which could, in Lender’s judgment, absent immediate exercise by Lender of a right or remedy under this Security Instrument, result in harm to Lender or impairment of the Note

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or this Security Instrument;

(4)
so long as the Loan is insured or held by HUD, any failure by Borrower to perform any of its obligations as and when required under the Borrower’s Regulatory Agreement, which failure continues beyond the applicable cure period, if any, specified in the Borrower’s Regulatory Agreement; however, violations under the terms of the Borrower’s Regulatory Agreement may only be treated as a default under this Security Instrument if HUD requests Lender to treat them as such; and,

(5)
so long as the Loan is insured or held by HUD, any Event of Default pursuant to the Operator’s Regulatory Agreement, provided that such Event of Default pursuant to the Operator’s Regulatory Agreement may only be treated as a default under this Security Instrument if HUD requests Lender to treat it as such.

(c) Lender shall deliver to the Principal(s) of Borrower, Notice, as provided in Section 31, within five (5) Business Days in each case where Lender has delivered Notice to Borrower of an Event of Default, in order to provide the Principal(s) an opportunity to cure either a Monetary Event of Default or a Covenant Event of Default.

23. REMEDIES CUMULATIVE. Each right and remedy provided in this Security Instrument is distinct from all other rights or remedies under this Security Instrument, the Note, or so long as the Loan is insured or held by HUD, HUD’s remedies under the Borrower’s Regulatory Agreement or afforded by applicable law, and each shall be cumulative and may be exercised concurrently, independently, or successively, in any order.

24. FORBEARANCE.

(a) So long as the Loan is insured by HUD, Lender shall not without obtaining the prior written consent of HUD, take any of the following actions: extend the time for payment of all or any part of the Indebtedness; reduce the payments due under this Security Instrument or the Note; release anyone liable for the payment of any amounts under this Security Instrument or the Note; accept a renewal of the Note; modify the terms and time of payment of the Indebtedness; join in any extension or subordination agreement; release any Mortgaged Property; take or release other or additional security; modify the rate of interest or period of amortization of the Note or change the amount of the monthly installments payable under the Note; and otherwise modify this Security Instrument or the Note. However, if the Contract of Insurance has been terminated, Lender may (but shall not be obligated to) agree with Borrower to any of the aforementioned actions in this Section and Lender shall not have to give Notice to or obtain the consent of any guarantor or third-party obligor.

(b) Any forbearance by Lender in exercising any right or remedy under the Note, this

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Security Instrument, or any other Loan Document or otherwise afforded by applicable law, shall not be a waiver of or preclude the exercise of any right or remedy. The acceptance by Lender of payment of all or any part of the Indebtedness after the due date of such payment, or in an amount that is less than the required payment, shall not be a waiver of Lender’s right to require prompt payment when due of all other payments on account of the Indebtedness or to exercise any right or remedy for any failure to make prompt payment. Enforcement by Lender of any security for the Indebtedness shall not constitute an election by Lender of remedies so as to preclude the exercise of any other right available to Lender. Lender’s receipt of any proceeds or awards under Section 19 and Section 20 shall not operate to cure or waive any Event of Default.

25. LOAN CHARGES. If any applicable law limiting the amount of interest or other charges permitted to be collected from Borrower in connection with the Loan is interpreted so that any interest or other charge provided for in any Loan Document, whether considered separately or together with other charges provided for in any Loan Document, violates that law, and Borrower is entitled to the benefit of that law, that interest or charge is hereby reduced to the extent necessary to eliminate that violation. The amounts, if any, previously paid to Lender in excess of the permitted amounts shall be applied by Lender to reduce the principal of the Indebtedness. For the purpose of determining whether any applicable law limiting the amount of interest or other charges permitted to be collected from Borrower has been violated, all Indebtedness that constitutes interest, as well as all other charges made in connection with the Indebtedness that constitute interest, shall be deemed to be allocated and spread ratably over the stated term of the Note. Unless otherwise required by applicable law, such allocation and spreading shall be effected in such a manner that the rate of interest so computed is uniform throughout the stated term of the Note.

26. WAIVER OF STATUTE OF LIMITATIONS. To the extent permitted by law, Borrower hereby waives the right to assert any statute of limitations as a bar to the enforcement of the lien of this Security Instrument or to any action brought to enforce any of the Loan Documents.

27. WAIVER OF MARSHALLING. Notwithstanding the existence of any other security interests in the Mortgaged Property held by Lender or by any other party, Lender shall have the right to determine the order in which any or all of the Mortgaged Property shall be subjected to the remedies provided in this Security Instrument and the Note or applicable law. Lender shall have the right to determine the order in which any or all portions of the Indebtedness are satisfied from the proceeds realized upon the exercise of such remedies. Borrower and any party who now or in the future acquires a security interest in the Mortgaged Property and who has actual or constructive notice of this Security Instrument waives any and all right to require the marshalling of assets or to require that any of the Mortgaged Property be sold in the inverse order of alienation or that any of the Mortgaged Property be sold in parcels or as an entirety in connection with the exercise of any of the remedies permitted by applicable law or provided in this Security Instrument.


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28. FURTHER ASSURANCES. Borrower shall execute, acknowledge, and deliver, at its sole cost and expense, all further acts, deeds, conveyances, assignments, estoppel certificates, financing statements, transfers and assurances as Lender may require from time to time in order to better assure, grant, and convey to Lender the rights intended to be granted, now or in the future, to Lender under this Security Instrument and the Note.

29. ESTOPPEL CERTIFICATE. Within ten (10) days after a request from Lender, Borrower shall deliver to Lender a written statement, signed and acknowledged by Borrower, certifying to Lender or any person designated by Lender, as of the date of such statement, (a) that the Note, (so long as the Loan is insured by HUD, the Borrower’s Regulatory Agreement) and this Security Instrument are unmodified and in full force and effect (or, if there have been modifications, that the Note, (so long as the Loan is insured by HUD, the Borrower’s Regulatory Agreement) and this Security Instrument are in full force and effect as modified and setting forth such modifications); (b) the unpaid principal balance of the Note; (c) the date to which interest under the Note has been paid; (d) that Borrower is not in default in paying the Indebtedness or in performing or observing any of the covenants or agreements contained in this Security Instrument, and the Note and (so long as the Loan is insured or held by HUD, the Borrower’s Regulatory Agreement) (or, if Borrower is in default, describing such default in reasonable detail); (e) whether or not there are then existing any setoffs or defenses known to Borrower against the enforcement of any right or remedy of Lender under the Note, (so long as the Loan is insured or held by HUD, the Borrower’s Regulatory Agreement) and this Security Instrument; and (f) any additional facts requested by Lender.

30. GOVERNING LAW; CONSENT TO JURISDICTION AND VENUE.

(a) This Security Instrument and the Note, if it does not itself expressly identify the law that is to apply to it, shall be governed by the laws of the Property Jurisdiction, except so long as the Loan is insured or held by HUD and solely as to rights and remedies of HUD as such local or state laws may be preempted by federal law.

(b) Borrower agrees that any controversy arising under or in relation to the Note or this Security Instrument shall be litigated exclusively in the Property Jurisdiction except as, so long as the Loan is insured or held by HUD and , solely as to rights and remedies of HUD, federal jurisdiction may be appropriate pursuant to any federal requirements. The State courts, and with respect to HUD’s rights and remedies, federal courts and Governmental Authorities in the Property Jurisdiction shall have exclusive jurisdiction over all controversies which shall arise under or in relation to the Note, any security for the Indebtedness, or this Security Instrument. Borrower irrevocably consents to service, jurisdiction, and venue of such courts for any such litigation and waives any other venue to which it might be entitled by virtue of domicile, habitual residence or otherwise.

31. NOTICE.


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(a) All Notices under or concerning this Security Instrument shall be in writing. Each Notice shall be addressed to the intended recipients at their respective addresses set forth in this Security Instrument , and shall be deemed given on the earliest to occur of (1) the date when the Notice is received by the addressee; (2) the first or second Business Day after the Notice is delivered to a recognized overnight courier service, with arrangements made for payment of charges for next or second Business Day delivery, respectively; or (3) the third Business Day after the Notice is deposited in the United States mail with postage prepaid, certified mail, return receipt requested. Failure of Lender to send Notice to Borrower or its Principal(s) shall not prevent the exercise of Lender’s rights or remedies under this Security Instrument or under the Loan Documents.

(b) Any party to this Security Instrument may change the address to which Notices intended for it are to be directed by means of Notice given to the other party in accordance with this Section 31. Each party agrees that it shall not refuse or reject delivery of any Notice given in accordance with this Section 31, that it shall acknowledge, in writing, the receipt of any Notice upon request by the other party and that any Notice rejected or refused by it shall be deemed for purposes of this Section 31 to have been received by the rejecting party on the date so refused or rejected, as conclusively established by the records of the U.S. Postal Service or the courier service.

(c) Any Notice under the Note which does not specify how Notice is to be given shall be given in accordance with this Section 31.

 
BORROWER:
Glenvue H&R Property Holdings, LLC
 
 
1145 Hembree Rd.
 
 
Roswell, GA 30076
 
 
Attention: Manager
 
 
 
 
LENDER:
Housing & Healthcare Finance, LLC
 
 
2 Wisconsin Circle, Ste. 540
 
 
Chevy Chase, Maryland 20815
 
 
Attention: Erik Lindenauer, Director



32. SALE OF NOTE; CHANGE IN SERVICER. The Note or a partial interest in the Note (together with this Security Instrument) may be sold one or more times without prior Notice to Borrower. A sale may result in a change of the loan servicer. There also may be one or more changes of the loan servicer unrelated to a sale of the Note. If there is a sale or transfer of all or a partial interest in the Note or a change of the loan servicer, Lender shall be responsible for ensuring that Borrower is given Notice of the sale, transfer and/or change.

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33. SINGLE ASSET BORROWER. Until the Indebtedness is paid in full or unless otherwise approved in writing by HUD so long as the Loan is insured or held by HUD, (a) Borrower shall be a single purpose entity and shall maintain the assets of the Mortgaged Property in segregated accounts in accordance with the Borrower’s Regulatory Agreement and Program Obligations and (b) Borrower (1) shall not acquire any real or personal property other than the Mortgaged Property and personal property related to the operation and maintenance of the Mortgaged Property, and so long as the Loan is insured or held by HUD, except pursuant to the Borrower’s Regulatory Agreement and Program Obligations and (2) shall not own or operate any business other than the ownership, management and/or operation of the Mortgaged Property, and so long as the Loan is insured or held by HUD, except pursuant to the Borrower’s Regulatory Agreement and Program Obligations.

34. SUCCESSORS AND ASSIGNS BOUND. This Security Instrument shall bind, and the rights granted by this Security Instrument shall inure to, the respective successors and assigns of Lender and Borrower.

35. JOINT AND SEVERAL LIABILITY. If more than one entity signs this Security Instrument as Borrower, the obligations of such entities shall be joint and several.

36. RELATIONSHIP OF PARTIES; NO THIRD PARTY BENEFICIARY.

(a) The relationship between Lender and Borrower shall be solely that of creditor and debtor, respectively, and nothing contained in this Security Instrument shall create any other relationship between Lender and Borrower.

(b) No creditor of any party to this Security Instrument and no other person (the term “person” includes, but is not limited to, any commercial or governmental entity or institution) shall be a third party beneficiary of this Security Instrument, the Note, or so long as the Loan is insured or held by HUD , the Borrower’s Regulatory Agreement. Without limiting the generality of the preceding sentence, (1) any servicing arrangement between Lender and any loan servicer for loss sharing or interim advancement of funds shall constitute a contractual obligation of such loan servicer that is independent of the obligation of Borrower for the payment of the Indebtedness, (2) Borrower shall not be a third party beneficiary of any servicing arrangement, and (3) no payment by the loan servicer under any servicing arrangement shall reduce the amount of the Indebtedness.

37. SEVERABILITY; AMENDMENTS. The invalidity or unenforceability of any provision of this Security Instrument shall not affect the validity or enforceability of any other provision, and all other provisions shall remain in full force and effect. This Security Instrument contains the entire agreement among the parties as to the rights granted and the obligations assumed in this Security Instrument. This Security Instrument may not be amended or modified except by a writing signed by the party against whom enforcement is sought.

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38. RULES OF CONSTRUCTION. The captions and headings of the Sections of this Security Instrument are for convenience only and shall be disregarded in construing this Security Instrument. Any reference in this Security Instrument to an “ Exhibit ” or a “ Section ” shall, unless otherwise explicitly provided, be construed as referring, respectively, to an Exhibit attached to this Security Instrument or to a Section of this Security Instrument. All Exhibits attached to or referred to in this Security Instrument are incorporated by reference into this Security Instrument. Use of the singular in this Security Instrument includes the plural and use of the plural includes the singular. As used in this Security Instrument, the term “ including ” means “including, but not limited to.”

39. LOAN SERVICING. All actions regarding the servicing of the Note, including the collection of payments, the giving and receipt of Notice, inspections of the Mortgaged Property, inspections of books and records, and the granting of consents and approvals, may be taken by the loan servicer unless Borrower receives Notice to the contrary. If Borrower receives conflicting Notices regarding the identity of the loan servicer or any other subject, any such Notice from Lender shall govern; provided that so long as the Loan is insured or held by HUD, if Borrower receives conflicting Notice regarding the identity of the loan servicer or any other subject, any such Notice from Lender shall govern unless there is a Notice from HUD and, in all cases, any Notice from HUD governs notwithstanding any Notice from any other party.

40. DISCLOSURE OF INFORMATION. To the extent permitted by law, Lender may furnish information regarding Borrower or the Mortgaged Property to third parties with an existing or prospective interest in the servicing, enforcement, evaluation, performance, purchase or securitization of the Indebtedness, including but not limited to trustees, master servicers, special servicers, rating agencies, and organizations maintaining databases on the underwriting and performance of healthcare mortgage loans.

41. NO CHANGE IN FACTS OR CIRCUMSTANCES. Borrower certifies that all information in the application for the Loan submitted to Lender (the “ Loan Application ”) and in all financial statements, rent rolls, reports, certificates and other documents submitted in connection with the Loan Application are complete and accurate in all material respects and that there has been no material adverse change in any fact or circumstance that would make any such information incomplete or inaccurate. The submission of false or incomplete information shall be a Covenant Event of Default.

42. ESTOPPEL. The Lender is not the agent of HUD. Any action by Lender in exercising any right or remedy under this Security Instrument shall not be a waiver or preclude the exercise by HUD of any right or remedy which HUD might have under the Borrower’s Regulatory Agreement or other Program Obligations.

43. ACCELERATION; REMEDIES. If a Monetary Event of Default occurs and is continuing for a period of thirty (30) days, Lender, at Lender’s option, may declare the Indebtedness

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to be immediately due and payable without further demand, and may invoke the power of sale and any other remedies permitted by applicable law or provided in this Security Instrument or in the Note. Following a Covenant Event of Default, Lender, at Lender’s option, but so long as the Loan is insured or held by HUD, only after receipt of the prior written approval of HUD, may declare the Indebtedness to be immediately due and payable without further demand, and may invoke the power of sale and any other remedies permitted by applicable law or provided in this Security Instrument or in the Note, or seek the appointment of a receiver for the Healthcare Facility. Borrower acknowledges that the power of sale granted in this Security Instrument may be exercised by Lender without prior judicial hearing. Lender shall be entitled to collect all costs and expenses incurred in pursuing such remedies, including reasonable attorneys’ fees (including but not limited to appellate litigation), costs of documentary evidence, abstracts and title reports.

44. FEDERAL REMEDIES. In addition to any rights and remedies set forth in the Borrower’s Regulatory Agreement, HUD has rights and remedies under federal law so long as HUD is the insurer or holder of the Loan, including but not limited to the right to foreclose pursuant to the Multifamily Mortgage Foreclosure Act of 1981, 12 U.S.C. 3701 et seq ., as amended, when HUD is the holder of the Note.

45. REMEDIES FOR WASTE. In addition to any other rights and remedies set forth in the Note and this Security Instrument or those available under applicable law, including exemplary damages where permitted, the following remedies for Waste by Borrower are available to Lender as necessary to give complete redress to Lender for Lender’s loss or damage:

(a) the exercise of the remedies available to Lender during the existence of a Covenant Event of Default, as set forth in Section 43 of this Security Instrument;

(b) an injunction prohibiting future Waste or requiring correction of Waste already committed, but only to the extent that Waste has impaired or threatens to impair Lender’s security; and

(c) recovery of damages, limited by the amount of Waste, to the extent that Waste has impaired Lender’s security. So long as the Loan is insured or held by HUD, any recovery of damages by Lender or HUD for Waste shall be applied, at the sole discretion of HUD, (1) to fees, costs and expenses (including reasonable attorneys’ fees) incurred by Lender; (2) to remedy Waste of the Mortgaged Property, (3) to the Indebtedness or (4) for any other purpose designated by HUD.

46. TERMINATION OF HUD RIGHTS AND REFERENCES. At such time as HUD no longer insures or holds the Note, (a) all rights and responsibilities of HUD shall conclude, all mortgage insurance and references to mortgage insurance premiums, all references to HUD, Ginnie Mae and Program Obligations and related terms and provisions shall cease, and all rights and obligations of HUD shall terminate; (b) all obligations and responsibilities of Borrower to HUD

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shall likewise terminate; and (c) all obligations and responsibilities of Lender to HUD shall likewise terminate; provided, however, nothing contained in this Section 46, shall in any fashion discharge Borrower from any obligations to HUD under the Borrower’s Regulatory Agreement or Program Obligations or Lender from any obligations to HUD under Program Obligations, which occurred prior to termination of the Contract of Insurance. The provisions of this Section 46 shall be given effect automatically upon the termination of the Contract of Insurance or the transfer of this Security Instrument by HUD to another party, provided that upon the request of Borrower, Lender or the party to whom this Security Instrument has been transferred, at no cost to HUD, HUD shall execute such documents as may be reasonably requested to confirm the provisions of this Section 46.

47. CONSTRUCTION FINANCING [IF APPLICABLE]. The Indebtedness represents funds to be used in the construction of certain Improvements on the Land, in accordance with the Building Loan Agreement which is incorporated herein by reference to the same extent and effect as if fully set forth and made herein (provided, however, that if and to the extent that the Building Loan Agreement is inconsistent herewith, this Security Instrument shall govern). If the construction of the Improvements to be made pursuant to the Building Loan Agreement are not made in accordance with the terms of said Building Loan Agreement, or Borrower otherwise defaults under the Building Loan Agreement, Lender, after due Notice to Borrower, or any subsequent owner, is hereby vested with full and complete authority to enter upon the Land to employ watchmen to protect such Improvements from depredation or injury and to preserve and protect the Personalty therein, to continue any and all outstanding contracts for the erection and completion of said Improvements, to make and enter into any contracts and obligations wherever necessary, either in its own name or in the name of Borrower, or other owner, and to pay and discharge all debts, obligations, and liabilities incurred thereby. All such sums so advanced by Lender (exclusive of advances of the principal of the Indebtedness) shall be added to the principal of the Indebtedness secured hereby and all shall be secured by this Security Instrument and shall be due and payable on demand with interest at the rate provided in the Note, but no such advances shall be insured unless same are specifically approved by HUD prior to the making thereof. The Indebtedness shall, at the option of Lender or holder of this Security Instrument and the Note, become due and payable on the failure of Borrower, or other owner, to keep and perform any of the covenants, conditions and agreements of the Building Loan Agreement. This covenant shall be terminated upon the completion of the Improvements to the satisfaction of Lender and the making of the final advance as provided in the Building Loan Agreement.

48. ENVIRONMENTAL HAZARDS.

(a) Definitions:

(1)
“ Hazardous Materials ” means petroleum and petroleum products and compounds containing them, including gasoline, diesel fuel and oil; explosives; flammable materials; radioactive materials; polychlorinated

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biphenyls (“ PCBs ”) and compounds containing them; lead and lead-based paint; asbestos or asbestos-containing materials in any form that is or could become friable; underground or above-ground storage tanks, whether empty or containing any substance; any substance the presence of which on the Mortgaged Property is prohibited by any Governmental Authority; any substance that requires special handling; and any other material or substance now or in the future defined as a “hazardous substance,” “hazardous material,” “hazardous waste,” “toxic substance,” toxic pollutant,” “contaminant,” or “pollutant” within the meaning of any Hazardous Materials Law.

(2)
“ Hazardous Materials Laws ” means all federal, state, and local laws, ordinances and regulations and standards, rules, policies and other governmental requirements, administrative rulings and court judgments and decrees in effect now or in the future and including all amendments that relate to Hazardous Materials and apply to Borrower or to the Mortgaged Property. Hazardous Materials Laws include, but are not limited to, the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601, et seq. , the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq. , the Toxic Substance Control Act, 15 U.S.C. Section 2601, et seq. , the Clean Water Act, 33 U.S.C. Section 1251, et seq. , and the Hazardous Materials Transportation Act, 49 U.S.C. Section 5101, et seq. , and their state analogs.

(3)
“ Environmental Permit ” means any permit, license, or other authorization issued under any Hazardous Materials Law with respect to any activities or businesses conducted on or in relation to the Mortgaged Property.

(b) Except for (1) matters covered by a written program of operations and maintenance approved in writing by Lender (“ O&M Program ”), (2) matters described in subsection (c) of this Section 48; or (3) (for so long as the Loan is insured or held by HUD) matters covered by Program Obligations that may differ from this Section 48 (with respect to lead based paint requirements, for example), Borrower shall not cause or permit any of the following:

(i)
any occurrence or condition on the Mortgaged Property or any other property of Borrower that is adjacent to the Mortgaged Property, which occurrence or condition is or may be in violation of Hazardous Materials Laws; or

(ii)
any violation of or noncompliance with the terms of any Environmental

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Permit with respect to the Mortgaged Property or any property of Borrower that is adjacent to the Mortgaged Property.

The matters described in clauses (i) and (ii) above are referred to collectively in this Section 48 as “ Prohibited Activities or Conditions ”.

(c) Prohibited Activities or Conditions shall not include the safe and lawful use and storage of quantities of (1) supplies, cleaning materials and petroleum products customarily used in the operation and maintenance of comparable healthcare properties, (2) cleaning materials, personal grooming items and other items sold in containers for consumer use and used by residents and occupants of residential dwelling units in the Mortgaged Property; and (3) petroleum products used in the operation and maintenance of motor vehicles and motor-operated equipment from time to time located on the Mortgaged Property’s parking areas, so long as all of the foregoing are used, stored, handled, transported and disposed of in compliance with Hazardous Materials Laws.

(d) Borrower shall take all commercially reasonable actions (including the inclusion of appropriate provisions in any Leases executed after the date of this Security Instrument) to prevent its employees, agents, and contractors, and all residents and other occupants from causing or permitting any Prohibited Activities or Conditions. Borrower shall not lease or allow the sublease or use of all or any portion of the Mortgaged Property to any resident or sublessee for nonresidential use by any user that, in the ordinary course of its business, would cause or permit any Prohibited Activities or Conditions.

(e) If an O&M Program has been established with respect to Hazardous Materials, Borrower shall comply in a timely manner with, and cause all employees, agents, and contractors of Borrower and any other persons encompassed by the O&M Program and present on the Mortgaged Property to comply with the O&M Program. All costs of performance of Borrower’s obligations under any O&M Program shall be paid by Borrower, and Lender’s out-of-pocket costs incurred in connection with the monitoring and review of the O&M Program and Borrower’s performance shall be paid by Borrower upon demand by Lender. Any such out-of-pocket costs of Lender which Borrower fails to pay promptly shall become an additional part of the Indebtedness as provided in Section 13; provided that so long as the Loan is insured by HUD, no advances made by Lender under this subsection (e) shall become an additional part of the Indebtedness unless such advances receive the prior written approval of HUD and provided further that unless approved by HUD, Lender shall have no obligation to make any such advances.

(f) Borrower represents and warrants to Lender that, except as previously disclosed by Borrower to Lender in writing:

(1)
Borrower has not at any time engaged in, caused or permitted any Prohibited Activities or Conditions;

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(2)
to the best of Borrower’s knowledge after reasonable and diligent inquiry, no Prohibited Activities or Conditions exist or have existed;

(3)
the Mortgaged Property does not now contain any underground storage tanks, and, to the best of Borrower’s knowledge after reasonable and diligent inquiry, the Mortgaged Property has not contained any underground storage tanks in the past. If there is an underground storage tank located on the Mortgaged Property that has been previously disclosed by Borrower to Lender in writing, that tank complies with all requirements of Hazardous Materials Laws;

(4)
Borrower has complied with all Hazardous Materials Laws, including all requirements for notification regarding releases of Hazardous Materials. Without limiting the generality of the foregoing, Borrower has obtained all Environmental Permits required for the operation of the Mortgaged Property in accordance with Hazardous Materials Laws now in effect and all such Environmental Permits are in full force and effect; no event has occurred with respect to the Mortgaged Property that constitutes, or with the passing of time or the giving of Notice would constitute, noncompliance with the terms of any Environmental Permit;

(5)
to the best of Borrower’s knowledge after reasonable and diligent inquiry, there are no actions, suits, claims or proceedings, pending or threatened, that involve the Mortgaged Property and allege, arise out of, or relate to any Prohibited Activities or Conditions; and

(6)
Borrower has not received any complaint, order, notice of violation or other communication from any Governmental Authority with regard to air emissions, water discharges, noise emissions or Hazardous Materials, or any other environmental, health or safety matters affecting the Mortgaged Property or any other property of Borrower that is adjacent to the Mortgaged Property that have not previously been resolved legally.

The representations and warranties in this Section 48 shall be continuing representations and warranties that shall be deemed to be made by Borrower throughout the term of the Loan, until the Indebtedness has been paid in full.

(g) Borrower shall promptly notify Lender in writing upon the occurrence of any of the following events:

(1)
Borrower’s discovery of any Prohibited Activities or Conditions;


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(2)
Borrower’s receipt of or knowledge of any complaint, order, notice of violation or other communication from any Governmental Authority or other person with regard to present or future alleged Prohibited Activities or Conditions or any other environmental, health or safety matters affecting the Mortgaged Property or any other property of Borrower that is adjacent to the Mortgaged Property; and

(3)
any representation or warranty in this Section 48 becoming untrue after the date of this Security Instrument.

Any such Notice given by Borrower shall not relieve Borrower of, or result in a waiver of, any obligation under this Security Instrument, the Note, or any other Loan Document.

(h) Borrower shall pay promptly the costs of any environmental inspections, tests or audits (“ Environmental Inspections ”) required by Lender in connection with any foreclosure or deed in lieu of foreclosure, or as a condition of Lender’s consent to any transfer under Section 21, or required by Lender following a reasonable determination by Lender that Prohibited Activities or Conditions may exist. Any such costs incurred by Lender (including the fees and out-of-pocket costs of attorneys and technical consultants whether incurred in connection with any judicial (appellate or otherwise) or administrative process or otherwise) which Borrower fails to pay promptly shall become an additional part of the Indebtedness as provided in Section 13; provided that so long as the Loan is insured by HUD, no advances made by Lender under this subsection (h) shall become an additional part of the Indebtedness unless such advances receive the prior written approval of HUD and provided further that unless approved by HUD, Lender shall have no obligation to make such further advances. The results of all Environmental Inspections made by Lender shall at all times remain the property of Lender and Lender shall have no obligation to disclose or otherwise make available to any party other than Borrower, and so long as the Loan is insured by HUD, to HUD, such results or any other information obtained by Lender in connection with its Environmental Inspections. Lender hereby reserves the right, and Borrower hereby expressly authorizes Lender, to make available to any party, including any prospective bidder at a foreclosure sale of the Mortgaged Property, the results of any Environmental Inspections made by Lender with respect to the Mortgaged Property. Borrower consents to Lender notifying any party (either as part of a notice of sale or otherwise) of the results of any of Lender’s Environmental Inspections. Borrower acknowledges that Lender cannot control or otherwise assure the truthfulness or accuracy of the results of any of its Environmental Inspections and that the release of such results to prospective bidders at a foreclosure sale of the Mortgaged Property may have a material and adverse effect upon the amount which a party may bid at such sale. Borrower agrees that Lender shall have no liability whatsoever as a result of delivering the results of any of its Environmental Inspections to any third party, and Borrower hereby releases and forever discharges Lender from any and all claims, damages, or causes of action, arising out of, connected with or incidental to the results of, the delivery of any of Lender’s Environmental Inspections.


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(i) If any investigation, site monitoring, containment, clean-up, restoration or other remedial work (“ Remedial Work ”) is necessary to comply with any Hazardous Materials Law that has or acquires jurisdiction over the Mortgaged Property or the use, operation or improvement of the Mortgaged Property under any Hazardous Materials Law, Borrower shall, by the earlier of (1) the applicable deadline required by the Hazardous Materials Law or (2) thirty (30) days after Notice from Lender demanding such action, begin performing the Remedial Work, and thereafter diligently prosecute it to completion, and shall in any event complete the work by the time required by applicable Hazardous Materials Law. If Borrower fails to begin on a timely basis or diligently prosecute any required Remedial Work, Lender may, at its option, cause the Remedial Work to be completed, in which case Borrower shall reimburse Lender on demand for the cost of doing so. So long as the Loan is insured by HUD, no advances made by Lender under this subsection (i) shall become part of the Indebtedness as provided in Section 13 unless such advances receive the prior written approval of HUD and provided further that unless approved by HUD, Lender shall have no obligation to make any such advances.

(j) Borrower shall cooperate with any inquiry by any Governmental Authority and shall comply with any governmental or judicial order which arises from any alleged Prohibited Activities or Conditions.

(k) Borrower shall indemnify [if Borrower is located in a state that requires an indemnification agreement separate and apart from this Security Instrument, Borrower shall provide said indemnification agreement to Lender] , hold harmless and defend (1) Lender, (2) any prior owner or holder of the Note, (3) the loan servicer, (4) any prior loan servicer, (5) the officers, directors, shareholders, partners, employees and trustees of any of the foregoing, and (6) the heirs, legal representatives, successors and assigns of each of the foregoing (each an “ Indemnitee ”, and collectively, “ Indemnitees ”) from and against all proceedings, claims, damages, penalties and costs (whether initiated or sought by Governmental Authorities or private parties), including fees and out of pocket expenses of attorneys and expert witnesses, investigatory fees, and remediation costs, whether incurred in connection with any judicial (including appellate) or administrative process or otherwise, arising directly or indirectly from any of the following except where the Mortgaged Property became contaminated subsequent to any transfer of ownership which was approved in writing by Lender (and so long as the Loan is insured or held by HUD, by HUD), provided such transferee assumes in writing all obligations of Borrower with respect to Prohibited Activities or Conditions:

(i)
any breach of any representation or warranty of Borrower in this Section 48;

(ii)
any failure by Borrower to perform or comply with any of its obligations under this Section 48;

(iii)
the existence or alleged existence of any Prohibited Activities or Conditions;

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(iv)
the actual or alleged violation of any Hazardous Materials Law.

(l) Counsel selected by Borrower to defend Indemnitees shall be subject to the approval of those Indemnitees. However, any Indemnitee may elect to defend any claim or legal or administrative proceeding at Borrower’s expense.

(m) Borrower shall not, without the prior written consent of those Indemnitees who are named as parties to a claim or legal or administrative proceeding (“ Claim ”), settle or compromise the Claim if the settlement (1) results in the entry of any judgment that does not include as an unconditional term the delivery by the claimant or plaintiff to Lender of a written release of those Indemnitees, satisfactory in form and substance to Lender; or (2) may materially and adversely affect Lender, as determined by Lender in its discretion.

(n) Borrower’s obligation to indemnify the Indemnitees shall not be limited or impaired by any of the following, or by any failure of Borrower or any guarantor to receive Notice of or consideration for any of the following:

(1)
any amendment or modification of any Loan Document;

(2)
any extensions of time for performance required by any Loan Document;

(3)
the accuracy or inaccuracy of any representations and warranties made by Borrower under this Security Instrument or any other Loan Document;

(4)
the release of Borrower or any other person, by Lender or by operation of law, from performance of any obligation under any Loan Document;

(5)
the release or substitution in whole or in part of any security for the Indebtedness; and

(6)
Lender’s failure to properly perfect any lien or security interest
given as security for the Indebtedness.

(o) Borrower shall, at its own cost and expense, do all of the following:

(1)
pay or satisfy any judgment or decree that may be entered against any Indemnitee or Indemnitees in any legal or administrative proceeding incident to any matters against which Indemnitees are entitled to be indemnified under this Section 48;

(2)
reimburse Indemnitees for any expenses paid or incurred in connection with any matters against which Indemnitees are entitled to be indemnified under this Section 48; and


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(3)
reimburse Indemnitees for any and all expenses, including fees and out-of-pocket expenses of attorneys and expert witnesses, paid or incurred in connection with the enforcement by Indemnitees of their rights under this Section 48, or in monitoring and participating in any legal (including appellate) or administrative proceeding.

(p) In any circumstances in which the indemnity under this Section 48 applies, Lender may employ its own legal counsel and consultants to prosecute, defend or negotiate any claim or legal or administrative proceeding and Lender, with the prior written consent of Borrower (which shall not be unreasonably withheld, delayed or conditioned), may settle or compromise any action or legal or administrative proceeding. Borrower shall reimburse Lender upon demand for all costs and expenses incurred by Lender, including all costs of settlements entered into in good faith, and the fees and out of pocket expenses of such attorneys (including but not limited to appellate litigation) and consultants.

(q) The provisions of this Section 48 shall be in addition to any and all other obligations and liabilities that Borrower may have under applicable law or under other Loan Documents, and each Indemnitee shall be entitled to indemnification under this Section 48 without regard to whether Lender or that Indemnitee has exercised any rights against the Mortgaged Property or any other security, pursued any rights against any guarantor, or pursued any other rights available under the Loan Documents or applicable law. If Borrower consists of more than one entity, the obligation of those entities to indemnify the Indemnitees under this Section 48 shall be joint and several. The obligation of Borrower to indemnify the Indemnitees under this Section 48 shall survive any repayment or discharge of the Indebtedness, any foreclosure proceeding, any foreclosure sale, any delivery of any deed in lieu of foreclosure, and any release of record of the lien of this Security Instrument. Notwithstanding anything in Section 48 to the contrary, so long as the Loan is insured or held by HUD, indemnification costs and reimbursements to Lender or to any or all Indemnitees shall be paid only from the available proceeds of an appropriate insurance policy or from Surplus Cash (if applicable) or other escrow accounts.

(r) So long as the Loan is insured or held by HUD, all references to Lender in this Section 48 shall also be construed to refer to HUD as its interest appears (solely as determined by HUD) and all notifications to Lender must also be made to HUD and all Lender approvals and exercises of discretion by Lender under this Section 48 must first have the prior written approval of HUD, provided, that, so long as the Loan is insured or held by HUD, the reference to Lender as an Indemnitee shall be construed to refer to HUD, and Borrower’s obligations to indemnify HUD as an Indemnitee shall remain in effect in accordance with this Section 48, notwithstanding the termination or expiration of insurance of the Loan by HUD.

(s) To the extent any HUD environmental requirements or standards are inconsistent or conflict with the provisions of this Section 48, the HUD requirements or standards shall control so

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long as the Loan is insured or held by HUD.

49. COUNTERPART SIGNATURES. This document may be executed in counterpart.

50. STATE LAW REQUIRMENTS. See Exhibit B attached hereto and made a part hereof.

51. ATTACHED EXHIBITS. The following Exhibits are attached to this Security Instrument:

        
 
 
 
 
 
 
x
Exhibit A
Description of the Land (required)
 
 
 
 
 
 
x
Exhibit B
Modifications to Security Instrument
 
 
 
 
 
 
 
 
 
 
    

                


[ SIGNATURE PAGE FOLLOWS ]

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IN WITNESS WHEREOF , Borrower has signed and delivered this Security Instrument or has caused this Security Instrument to be signed and delivered by its duly authorized representative, as a sealed instrument.


                            
 
 
 
 
BORROWER:
Signed, sealed and delivered in the presence of:
 
 
GLENVUE H&R PROPERTY HOLDINGS, LLC
 
 
 
 
 
 
  /s/ Rachel S. Zinkand
 
 
 
 
 
Witness
 
 
 
 
 
 
 
 
By
/s/ Ronald W. Fleming
  /s/ Ellen W. Smith
 
 
 
Ronald W. Fleming, Manager
Notary Public
 
 
 
 
 
 
 
My Commission Expires:
 
 
 
 
 
[NOTARIAL SEAL]
 

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EXHIBIT A


ALL THAT TRACT OR PARCEL OF LAND LYING IN AND BEING IN GEORGIA MILITIA DISTRICT 1432, CITY OF GLENNVILLE, TATTNALL COUNTY, AND BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS:

BEGINNING AT A POINT AT THE NORTH RIGHT OF WAY OF HENCART ROAD (60 FOOT RIGHT OF WAY) AND THE EAST RIGHT OF WAY OF NORTH VETERANS BOULEVARD (80 FOOT RIGHT OF WAY), THENCE NORTH ALONG THE SAID RIGHT OF WAY OF NORTH VETERANS BOULEVARD A DISTANCE OF 377.81 FEET TO AN IRON PIN FOUND, WHICH IS THE POINT OF BEGINNING;

THENCE ALONG THE SAID RIGHT OF WAY N 16 DEGREES 30 MINUTES 33 SECONDS E A DISTANCE OF 614.83 FEET TO AN IRON PIN SET; THENCE LEAVING THE SAID RIGHT OF WAY AND CONTINUING S 69 DEGREES 19 MINUTES 04 SECONDS E A DISTANCE OF 300.24 FEET TO AN IRON PIN SET AT THE RIGHT OF WAY OF CASWELL STREET (60 FOOT RIGHT OF WAY); THENCE ALONG THE SAID RIGHT OF WAY WITH A CURVE TURNING TO THE RIGHT WITH AN ARC LENGTH OF 474.33 FEET WITH A RADIUS OF 562.97 FEET WITH A CHORD BEARING OF S 06 DEGREES 40 MINUTES 30 SECONDS E WITH A CHORD LENGTH OF 460.42 FEET TO AN IRON PIN FOUND; THENCE LEAVING THE SAID RIGHT OF WAY N 75 DEGREES 52 MINUTES 20 SECONDS W A DISTANCE OF 157.55 FEET TO A CONCRETE MONUMENT FOUND; THENCE S 03 DEGREES 29 MINUTES 47 SECONDS W A DISTANCE OF 214.81 FEET TO AN IRON PIN SET TO THE SAID RIGHT OF WAY OF HENCART ROAD; THENCE ALONG THE SAID RIGHT OF WAY S 66 DEGREES 55 MINUTES 49 SECONDS W A DISTANCE OF 19.97 FEET TO AN IRON PIN FOUND; THENCE LEAVING THE SAID RIGHT OF WAY AND CONTINUING N 64 DEGREES 06 MINUTES 58 SECONDS W A DISTANCE OF 361.10 FEET TO AN IRON PIN FOUND, WHICH IS THE POINT OF BEGINNING

SAID TRACT OR PARCEL OF LAND CONTAINS 5.811 ACRES AND IS DEPICTED ON THAT ALTA/ACSM PLAT OF SURVEY, BY LANDPRO SURVEYING AND MAPPING, INC., SEALED AND CERTIFIED BY JAMES H. RADER, GRLS NO. 3033, DATED NOVEMBER 5, 2013.




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EXHIBIT B

Modifications to Security Instrument

The following modifications are made to the text of the Security Instrument of which this Exhibit is a part:

The following sections are inserted into the Security Instrument and made a part thereof:

43.      ACCELERATION: REMEDIES.          The following additional Georgia provisions pertain to the power of sale granted in the Security Instrument:

Lender may sell and dispose of the Mortgaged Property at public auction, at the usual place for conducting sales at the courthouse in the county where all or any part of the Mortgaged Property is located, to the highest bidder for cash, first advertising the time, terms and place of such sale by publishing a notice of sale once a week for four consecutive weeks (without regard to the actual number of days) in a newspaper in which sheriff’s advertisements are published in such county, all other notice being waived by Borrower; and Lender may thereupon execute and deliver to the purchaser a sufficient instrument of conveyance of the Mortgaged Property in fee simple, which may contain recitals as to the happening of the default upon which the execution of the power of sale granted by this Section depends. The recitals in the instrument of conveyance shall be presumptive evidence that Lender duly complied with all preliminary acts prerequisite to the sale and instrument of conveyance. Borrower constitutes and appoints Lender as Borrower’s agent and attorney-in-fact to make such recitals, sale and conveyance. Borrower ratifies all of Lender’s acts, as such attorney-in-fact, and Borrower agrees that such recitals shall be binding and conclusive upon Borrower and that the conveyance to be made by Lender (and in the event of a deed in lieu of foreclosure, then as to such conveyance) shall be effectual to bar all right, title and interest, equity of redemption, including all statutory redemption, homestead, dower, curtsey and all other exemptions of Borrower, or its successors in interest, in and to the Mortgaged Property.

The Mortgaged Property may be sold in one parcel and as an entirety, or in such parcels, manner or order as Lender, in its discretion, may elect, and one or more exercises of the powers granted in this Section shall not extinguish or exhaust the power unless the entire Mortgaged Property is sold or the Indebtedness is paid in full, and Lender shall collect the proceeds of such sale, applying such proceeds as provided in this Section. In the event of a deficiency, Borrower shall immediately on demand from Lender pay such deficiency to Lender, subject to the provisions of the Note limiting Borrower’s personal liability for payment of the Indebtedness. Borrower acknowledges that Lender may bid for and purchase the Mortgaged Property at any foreclosure sale and shall be entitled to apply all or any part of the Indebtedness as a credit to the purchase price. Borrower covenants and agrees that Lender shall apply the proceeds of the sale in the following order: (a) to all reasonable costs and expenses of the sale, including reasonable attorneys’ fees and costs of title evidence; (b)

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to the Indebtedness in such order as Lender, in Lender’s discretion, directs; and (c) the excess, if any, to the person or persons legally entitled to the excess. The power and agency granted in this Section 43 are coupled with an interest, are irrevocable by death or otherwise and are in addition to the remedies for collection of the Indebtedness as provided by law.

If the Mortgaged Property is sold pursuant to this Section 43, Borrower, or any person holding possession of the Mortgaged Property through Borrower, shall surrender possession of the Mortgaged Property to the purchaser at such sale on demand. If possession is not surrendered on demand, Borrower or such person shall be a tenant holding over and may be dispossessed in accordance with Georgia law.

50.      FUTURE ADVANCES. Upon request of Borrower, the original holder of the Note may make Future Advances to Borrower prior to cancellation of this instrument. Such future advances, with interest thereon, shall be secured by this Security Instrument when evidenced by promissory notes stating that said notes are secured hereby. At no time shall the principal amount of the indebtedness secured by this Security Instrument, and including sums advanced in accordance herewith to protect the security of this instrument, exceed the original amount of the Note (US $ 8,816,800.00) plus the additional sum of US $2,204,200.00.

52.      RELEASE. Upon payment of the Indebtedness, Lender shall cancel this Security Instrument. Borrower shall pay Lender’s reasonable costs incurred in canceling this Security Instrument.

53.      DEED TO SECURE DEBT. This conveyance is to be construed under the existing laws of the State of Georgia as a deed passing title, and not as a mortgage, and is intended to secure the payment of the Indebtedness.

54.      BORROWER’S WAIVER OF CERTAIN RIGHTS. To the fullest extent permitted by law, Borrower agrees that Borrower will not at any time insist upon, plead, claim or take the benefit or advantage of any present or future law providing for any appraisement, valuation, stay, extension or redemption, homestead, moratorium, reinstatement, marshalling or forbearance, and Borrower, for Borrower, Borrower’s heirs, devisees, representatives, successors and assigns, and for any and all persons ever claiming any interest in the Mortgaged Property, to the fullest extent permitted by law, waives and releases all rights of redemption, valuation, appraisement, stay of execution, reinstatement (including all rights under O.C.G.A. Section 44-14-85), notice of intention to mature or declare due the whole of the Indebtedness, and all rights to a marshaling of assets of Borrower, including the Mortgaged Property.

55.      ASSUMPTION NOT A NOVATION. Lender’s acceptance of an assumption of the obligations of this Instrument and the Note, and the release of Borrower pursuant to Section 21, shall not constitute a novation and shall not affect the priority of the lien created by this Security Instrument.


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56.      WAIVER OF TRIAL BY JURY . BORROWER AND LENDER EACH (A) COVENANTS AND AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS SECURITY INSTRUMENT OR THE RELATIONSHIP BETWEEN THE PARTIES AS BORROWER AND LENDER THAT IS TRIABLE OF RIGHT BY A JURY AND (B) WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL.





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Exhibit 10.25


Healthcare Regulatory Agreement - Borrower
Section 232
U.S. Department of Housing
and Urban Development
Office of Residential
Care Facilities
OMB Approval No. 2502-0605
(exp. 06/30/2017)
Public reporting burden for this collection of information is estimated to average 0.5 hours. This includes the time for collecting, reviewing, and reporting the data. The information is being collected to obtain the supportive documentation which must be submitted to HUD for approval, and is necessary to ensure that viable projects are developed and maintained. The Department will use this information to determine if properties meet HUD requirements with respect to development, operation and/or asset management, as well as ensuring the continued marketability of the properties. This agency may not collect this information, and you are not required to complete this form, unless it displays a currently valid OMB control number.

Warning: Any person who knowingly presents a false, fictitious, or fraudulent statement or claim in a matter within the jurisdiction of the U.S. Department of Housing and Urban Development is subject to criminal penalties, civil liability, and administrative sanctions.

Project Name :      EAGLEWOOD CARE CENTER

FHA Project No. :      043-22101

Project Location :      Springfield, Clark County, Ohio

Lender :          HOUSING & HEALTHCARE FINANCE, LLC,
a Delaware limited liability company

Original Principal Amount of Note :      $5,678,400.00

Date of Note :          as of September 24, 2014

Originally endorsed for insurance under Section 232, pursuant to Section 223(f)

Borrower :          WOODLAND MANOR PROPERTY HOLDINGS, LLC,
a Georgia limited liability company
Profit-Motivated X Non-Profit ___
Is Non-Profit Borrower permitted to take Distributions? Yes N/A No N/A
(Failure to check the appropriate space(s) shall not affect the enforceability or application of this Agreement.)

Recording requested by, and
After recording return to:
Jeremy F. Segall, Esq.
GUTNICKI LLP
4711 Golf Rd., Ste. 200
Skokie, Illinois 60076


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This Healthcare Regulatory Agreement - Borrower (this “ Agreement ”) is entered into this 24th day of September , 2014, between WOODLAND MANOR PROPERTY HOLDINGS, LLC , a limited liability company organized and existing under the laws of Georgia , whose address is 1145 Hembree Rd., Roswell, Georgia 30076 , its successors, heirs, and assigns (jointly and severally) (“ Borrower ”) and the U.S. Department of Housing and Urban Development, acting by and through the Secretary, his or her successors, assigns or designates (“ HUD ”). Borrower is sometimes also referred to as “Owner” or “Mortgagor” in the Loan Documents and Program Obligations. If Borrower is also Operator, references in this Agreement to Operator refer to Borrower. To the extent that Borrower contracts with any other party to perform any functions included in this Agreement, Borrower shall maintain ultimate responsibility for performance of all required functions included herein.

In consideration of, and in exchange for an action by HUD, HUD and Borrower agree to the terms of this Agreement. The HUD action may be one of the following: HUD’s endorsement for insurance of the Note, HUD’s consent to the transfer of any of the Mortgaged Property, HUD’s sale and conveyance of any of the Mortgaged Property, or HUD’s consent to other actions related to Borrower, the Project, or to the Mortgaged Property.

Borrower and HUD execute this Agreement in order to comply with Program Obligations, with the requirements of the National Housing Act, as amended, and the regulations adopted by HUD pursuant thereto. This Agreement shall continue during such period of time as HUD shall be the owner, holder, or insurer of the Note. Upon satisfaction of the Note, as evidenced by the discharge or release of the Borrower’s Security Instrument, this Agreement shall automatically terminate. However, Borrower shall be responsible for any violations of this Agreement which occurred prior to termination.

Violation of this Agreement or Program Obligations may subject Borrower and other signatories hereto to adverse actions.

Borrower and HUD covenant and agree as follows:

I. DEFINITIONS.

1. DEFINITIONS. Any capitalized term or word used herein but not defined shall have the meaning given to such term in the Borrower’s Security Instrument. The following terms, when used in this Agreement (including when used in the above recitals), shall have the following meanings, whether capitalized or not and whether singular or plural, unless, in the context, an incongruity results:

“ Affiliate ” is defined in 24 C.F.R. 200.215, or any successor regulation.

“ Approved Use ” means the use of the Project for the operation of the Healthcare Facility as a nursing home facility with 113 beds, of which not less than 113 beds are to be in use and such other

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uses as may be approved in writing from time to time by HUD based upon a request made by Borrower, Master Tenant, or Operator, but excluding any uses that are discontinued with the written approval of HUD.

“ Borrower ” shall mean the entity identified as “Borrower” in the first paragraph of this Agreement, together with any successors, heirs, and assigns (jointly and severally). “Borrower” shall include any person or entity taking title to the Mortgaged Property whether or not such person or entity assumes the Note. “Borrower” is sometimes also referred to in the Loan Documents and Program Obligations as the “Obligor,” the “Owner,” and/or the “Mortgagor.”

“ Borrower-Operator Agreement ” means any agreement relating to the operation of the Healthcare Facility by and between Borrower Master Tenant and Operator, including any Operator Lease.

“ Borrower’s Security Instrument ” means the Open-End Healthcare Mortgage Deed , Assignment of Leases, Rents and Revenue and Security Agreement, and shall be deemed to be the mortgage as defined by Program Obligations.

“ Distribution ” means any disbursal, conveyance, loan or transfer of cash, any asset of Borrower, or any other portion of the Mortgaged Property, other than in payment of Reasonable Operating Expenses.

“ Firm Commitment ” means the commitment for insurance of advances or commitment for insurance upon completion, dated June 18, 2014, issued to Lender by HUD under which the debt evidenced by the Note is to be insured pursuant to a Section of the National Housing Act.

“ Fixtures ” has the meaning set forth in the Borrower’s Security Instrument.

“ Healthcare Facility ” means that portion of the Project operated on the Land as a Nursing Home, Intermediate Care Facility, Board and Care Home, Assisted Living Facility and/or any other healthcare facility authorized to receive insured mortgage financing pursuant to Section 232 of the National Housing Act, as amended, including any commercial space included in the facility.

“ HUD ” means the U.S. Department of Housing and Urban Development acting by and through the Secretary in the capacity as insurer or holder of the Loan under the authority of the National Housing Act, as amended, the Department of Housing and Urban Development Act, as amended, or any other federal law or regulation pertaining to the Loan or the Project.

“ Improvements ” has the meaning set forth in the Borrower’s Security Instrument.


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“ Indebtedness ” means the principal of, interest on, and all other amounts due at any time under the Note or the Loan Documents, including prepayment premiums, late charges, default interest, and advances to protect the security as provided in the Loan Documents.

“ Land ” has the meaning set forth in the Borrower’s Security Instrument and is also legally described on Exhibit A , attached hereto and incorporated herein.

“ Lender ” means the entity identified as “Lender” in the first paragraph of the Borrower’s Security Instrument, or any subsequent holder of the Note, and whenever the term “Lender” is used herein, the same shall be deemed to include the “Obligee”, or the “Trustee(s)” and the “Beneficiary” of the Borrower’s Security Instrument, and shall also be deemed to be the “Mortgagee” as defined by Program Obligations.

“ Loan Documents ” has the meaning set forth in the Borrower’s Security Instrument.

“ Master Lease ” means that certain Master Lease Agreement , in which the Healthcare Facility is aggregated with other HUD-insured healthcare facilities and leased to the Master Tenant.

“ Master Tenant ” means 2014 HUD MASTER TENANT, LLC , a limited liability company organized and existing under the laws of Georgia , the master tenant pursuant to the Master Lease.

“ Master Tenant’s Regulatory Agreement ” means that certain Healthcare Regulatory Agreement - Master Tenant, relating to the Project and entered into by Master Tenant for the benefit of HUD.

“ Mortgaged Property ” has the meaning set forth in the Borrower’s Security Instrument.

“ Non-Profit Borrower ” means a Borrower that is treated under the Firm Commitment as an entity organized for purposes other than profit or gain for itself or persons identified therewith, pursuant to Section 501(c)(3) or other applicable provisions of the Internal Revenue Code. For transactions entered into pursuant to Section 223(a)(7) of the National Housing Act, a Borrower who executed with HUD’s permission a “for-profit” regulatory agreement in connection with the original loan being refinanced through this transaction shall not be considered a “Non-Profit Borrower” for purposes of this Agreement and may designate itself as a “Profit-Motivated” entity on page 1, provided, however, that any conditions in the Firm Commitment conflicting with the above statement shall control.

“ Note ” means the Note executed by Borrower, described in the Borrower’s Security Instrument, including all schedules, riders, allonges and addenda, as such Note may be amended from time to time.

“ Notice ” is defined in Section 45.


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“ Operator ” means WOODLAND MANOR NURSING, LLC , a limited liability company organized and existing under the laws of Georgia , or any subsequent operator approved by HUD.

“ Operator Lease ” means a lease by Borrower Master Tenant to Operator providing for the operation of the Healthcare Facility.

“ Operator’s Regulatory Agreement ” means that certain Healthcare Regulatory Agreement - Operator relating to the Project and entered into by Operator for the benefit of HUD.

“ Personalty ” has the meaning set forth in the Borrower’s Security Instrument.

“ Principal ” is defined in 24 C.F.R. 200.215, and any successor regulation, provided that for purposes of the Loan Documents, “Principal” shall also include the managing member and any other member that has a twenty-five percent (25%) or more interest in a limited liability company.

“ Program Obligations ” means (1) all applicable statutes and any regulations issued by HUD pursuant thereto that apply to the Project, including all amendments to such statutes and regulations, as they become effective, except that changes subject to notice and comment rulemaking shall become effective only upon completion of the rulemaking process, and (2) all current requirements in HUD handbooks and guides, notices, and mortgagee letters that apply to the Project, and all future updates, changes and amendments thereto, as they become effective, except that changes subject to notice and comment rulemaking shall become effective only upon completion of the rulemaking process, and provided that such future updates, changes and amendments shall be applicable to the Project only to the extent that they interpret, clarify and implement terms in this Agreement rather than add or delete provisions from such document. Handbooks, guides, notices, and mortgagee letters are available on HUD’s official website: http://www.hud.gov/offices/adm/hudclips/index.cfm or a successor location to that site.

“ Project ” has the meaning set forth in the Borrower’s Security Instrument.

“ Property Jurisdiction ” is any jurisdiction in which the Land is located.

“ Reasonable Operating Expenses ” means expenses that arise from the operation, maintenance and routine repair of the Project, including all payments and deposits required under this Agreement and any of the Loan Documents, and comply with the requirements of 24 C.F.R. 232.1007, or successor regulation.

“ Rent ,” “ Profits ” and “ Income ” shall include: all rent due pursuant to any Master Lease or Operator Lease; any payments due pursuant to any Residential Agreement; any other lease payments, revenues, charges, fees and assistance payments arising from the operation of the Project, including but not limited to, if and for so long as applicable, commercial leases, workers’ compensation, social

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security, Medicare, Medicaid, and other third-party reimbursement payments, Accounts Receivable (as defined in the Borrower’s Security Instrument) and all payments and income arising from the operation of the Healthcare Facility and/or the provision of services to residents thereof.

“ Reserve for Replacement ” is defined in Section 13.

“ Residential Agreement ” means a lease or other resident agreement between the operator of the Healthcare Facility and a resident setting forth the terms of the resident’s living arrangement and the provision of any related services.

“ Residual Receipts ” means certain funds held by a Non-Profit Borrower which are restricted in their use by this Agreement and Program Obligations, and otherwise described in Section 17.

“ Surplus Cash ” is defined in Section 15.

“ Taxes ” means all taxes, assessments, vault rentals and other charges, if any, general, special or otherwise, including all assessments for schools, public betterments and general or local improvements, that are levied, assessed or imposed by any public authority or quasi-public authority, and that, if not paid, could become a lien on the Land or the Improvements.

“ Waste ” means a failure to keep the Project in decent, safe and sanitary condition and in good repair. “Waste” also means the failure to meet certain financial obligations regarding the payment of Taxes and the relinquishment of the possession of Rents. During any period in which HUD insures the Loan or holds a security interest on the Mortgaged Property, Waste is committed when, without Lender’s and HUD’s express written consent, Borrower:
(1)
physically changes, or permits changes to, the Mortgaged Property, whether negligently or intentionally, in a manner that reduces its value;

(2)
fails to maintain the Mortgaged Property in decent, safe, and sanitary condition and in good repair;

(3)
fails to pay, or cause to be paid, before delinquency any Taxes that because of such failure, may subject the Project to a lien having priority over the Borrower’s Security Instrument;

(4)
materially fails to comply with covenants in the Note, the Borrower’s Security Instrument, this Agreement, or any of the Loan Documents respecting physical care, maintenance, construction, abandonment, demolition, or insurance against casualty of the Mortgaged Property; or

(5)
retains possession of Rents to which Lender or its assigns have the right of possession under the terms of the Loan Documents.


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II. CONSTRUCTION; REPAIRS.

2. CONSTRUCTION FUNDS. Borrower shall keep construction funds of the Project, if any, separate and apart from operating funds of the Project, including without limitation any funds necessary to operate the Healthcare Facility.

3. UNPAID OBLIGATIONS. Borrower certifies that upon final endorsement of the Note by HUD, Borrower shall have no unpaid obligations in connection with the purchase of the Mortgaged Property, the construction of the Mortgaged Property, or with respect to the Borrower’s Security Instrument except such unpaid obligations as have the written approval of HUD as to terms, form and amount.

4. LENDER’S CERTIFICATE. Borrower shall be bound by the terms of either the Lender’s Certificate, a copy of which has been provided to Borrower, and/or the Request for Endorsement of Credit Instrument & Certificate of Lender, Borrower & General Contractor, as applicable (a copy of which has been provided to Borrower), insofar as the applicable document establishes or reflects obligations of Borrower, and Borrower agrees that the fees and expenses enumerated in the applicable document have been fully paid or payment has been provided for as set forth in the applicable document and that all funds deposited with Lender shall be used for the purposes set forth in the applicable document insofar as Borrower has rights and obligations in respect thereto.

5. CONSTRUCTION COMMENCEMENT/REPAIRS. Borrower shall not commence, and has not commenced, construction or substantial rehabilitation of the Mortgaged Property prior to HUD endorsement of the Note except as permitted by Program Obligations or as otherwise permitted by HUD, and provided that this Section 5 is not applicable if HUD has given prior written approval to an early commencement or early start of construction, or if this Project is an Insurance Upon Completion loan or involves a loan refinancing.

6. DRAWINGS AND SPECIFICATIONS. The Project shall be constructed in accordance with the terms of the Construction Contract as approved by HUD, if any, and with the “Drawings and Specifications,” as such term is referred to in such Construction Contract.

7. REQUIRED CONSTRUCTION PERMITS. Unless otherwise required in the Construction Contract and Building Loan Agreement, Borrower has obtained all necessary certificates, permits, licenses, qualifications, authorizations, consents and approvals from all necessary Governmental Authorities to own, construct or substantially rehabilitate, to carry out all of the transactions required by the Loan Documents and to comply with all applicable federal statutes and regulations of HUD in effect on the date of the Firm Commitment, except for those, if any, which customarily would be obtained at a later date, at an appropriate stage of construction or completion thereof, and which the Borrower shall obtain in the future. The licenses and permits that are in effect as of the date hereof are sufficient to allow any construction (or substantial

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rehabilitation, as applicable) of the Improvements to proceed to completion in the ordinary course. As the construction (or substantial rehabilitation, as applicable) of the Project progresses, unless otherwise required by the Construction Contract, Borrower shall procure and submit all necessary building and other permits required by Governmental Authorities. The Project shall not be available for residency by any resident, nor shall the Healthcare Facility commence operations, except to the extent approved by prior written consent of HUD and of all other legal authorities having jurisdiction of the Project.

8. PRE-COMPLETION ACCOUNTING REQUIREMENTS. Borrower shall submit an accounting to HUD, as required by Program Obligations, for all receipts and disbursements during the period starting with the date of first occupancy of the Mortgaged Property after [initial] endorsement of the Note and ending, at the option of Borrower, any date after completion of the Project, as determined in accordance with Program Obligations. Any income of the Project in excess of disbursements for HUD-approved construction and development costs and Reasonable Operating Expenses, as such excess is determined by HUD, shall be treated as a recovery of construction cost, except as otherwise allowed in Program Obligations.

III. FINANCIAL MANAGEMENT.

9. OUTSTANDING OBLIGATIONS. Borrower shall have no obligations as of the date of this Agreement except those approved by HUD in writing and, except for those approved obligations, the Land has been paid for in full (or if the Land is subject to a leasehold interest, it must be subject to a HUD-approved lease), and is free from any liens or purchase money obligations, except as approved by HUD. As of the date hereof, all contractual obligations relating to the Project have been fully disclosed to HUD.

10. PAYMENTS. Borrower shall make promptly all payments, including any deposits to required reserves, due under the Loan Documents, including without limitation the Note and the Borrower’s Security Instrument.

11. PROPERTY AND OPERATION; ENCUMBRANCES.

(a) Borrower shall deposit all receipts of Borrower relating to the Project including all Rents, Advances, and equity or capital contributions required under the Firm Commitment or otherwise advanced for the purpose and as part of the Mortgaged Property, in the name of Borrower, for the benefit of the Project, in a federally insured depository or depositories and in accordance with Program Obligations, provided that, in accordance with Program Obligations, an account held in an institution approved by the Government National Mortgage Association may have a balance that exceeds the amount to which such deposit insurance is limited. Equity or capital contributions shall not include certain syndication proceeds, such as proceeds from Low Income Housing Tax Credit transactions used to repay bridge loans, all as more fully set forth in Program Obligations. Such funds shall be withdrawn only in accordance with the provisions of this Agreement and

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Program Obligations. Any person or entity receiving Mortgaged Property or any other proceeds of the Project other than for eligible purposes pursuant to this Agreement shall immediately deliver such Mortgaged Property or other proceeds to Borrower for the benefit of the Project and failing so to do shall hold and be deemed to hold such Mortgaged Property in trust for the benefit of the Project.

(b) Borrower shall not engage in any business or activity, including the operation of any other project or other healthcare facility, or other ancillary businesses, or incur any liability or obligation not in connection with the Project. Borrower shall not acquire an Affiliate or contract to enter into any affiliation with any party, except as approved by HUD.

(c) Borrower shall immediately satisfy or obtain a release of any mechanic’s lien, attachment, judgment lien, or any other lien that attaches to the Mortgaged Property, except to the extent permitted by HUD.

(d) Penalties, including but not limited to delinquent tax penalties, shall not be paid from the Mortgaged Property except to the extent such payments are considered Distributions and are allowed pursuant to this Agreement.

(e) Borrower shall promptly notify HUD of the appointment of any receiver for the Project, the filing of a petition in bankruptcy or insolvency or for reorganization, as well as the retention of any attorneys, consultants or other professionals in anticipation of such an appointment or filing.

(f) Borrower shall cause the Project to be insured at all times in accordance with the Borrower’s Security Instrument and Program Obligations, and Borrower shall notify HUD of all payments received, or claimed, from an insurer.

(g) Borrower shall notify HUD of any action or proceeding relating to any condemnation or other taking, or conveyance in lieu thereof, of all or any part of the Mortgaged Property, whether direct or indirect condemnation.

(h) Borrower shall notify HUD of any litigation proceeding filed against Borrower or Principals, Operator, the Healthcare Facility, or the Project, or any litigation proceeding filed by Borrower, pursuant to Program Obligations.

(i) If the Healthcare Facility is an Assisted Living Facility, Borrower shall require that no more than one person shall occupy any residential unit of the Healthcare Facility unless Operator receives prior written consent from all residents of such unit.

12. FINANCIAL ACCOUNTING. Borrower shall keep the books and accounts of the operation of the Mortgaged Property in accordance with Program Obligations. Financial records of Borrower and the Project shall be complete, accurate and current at all times. Posting must be

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made at least monthly to the ledger accounts, and year-end adjusting entries must be posted promptly in accordance with sound accounting principles. All expenditures in connection with the Project must be fully documented so as to provide reasonable assurance to all persons or entities that review such expenditures that such expenditures are permitted under Program Obligations. Undocumented expenses shall not be considered Reasonable Operating Expenses.

13. RESERVE FOR REPLACEMENT.

(a) Borrower shall establish and maintain a Reserve for Replacement account for defraying certain costs for replacing major structural elements and mechanical equipment of the Project or for any other purpose. The Reserve for Replacement shall be deposited with Lender or in a safe and responsible depository designated by Lender in accordance with Program Obligations. Such funds shall at all times remain under the control of Lender or Lender’s designee, whether in the form of a cash deposit or invested in obligations of, or fully guaranteed as to principal by, the United States of America or in such other investments as may be allowed by HUD and shall be held in accounts insured or guaranteed by a federal agency and in accordance with Program Obligations.

(b) Borrower shall deposit at endorsement of the Note an initial amount of $247,500.00, if applicable, and Borrower shall deposit a monthly amount of $5,528.00, concurrently with the beginning of payments towards amortization of the Note unless a different date or amount is established by HUD. At least every ten years, starting November 21, 2023 , and more frequently at HUD’s discretion, Borrower shall submit to HUD a written analysis of its use of the Reserve for Replacement during the prior ten years and the projected use of the Reserve for Replacement funds during the coming ten years in accordance with Program Obligations. The amount of the monthly deposit may be increased or decreased from time to time at the written direction of HUD without a recorded amendment to this Agreement. In connection therewith, every ten years starting November 21, 2023 , the Lender shall obtain a physical and capital needs assessment report for HUD to evaluate. The cost of such report may be paid from the Reserve for Replacements. HUD may, in its sole discretion, require Borrower to maintain a minimum balance in the account, in an amount to be set by HUD.

(c) Borrower shall carry the balance in this account on the financial records as a restricted asset. The Reserve for Replacement shall be invested in accordance with Program Obligations, and any interest earned on the investment shall be deposited in the Reserve for Replacement for use by the Project in accordance with this Section 13.

(d) Disbursements from such account shall only be made after consent, in writing, of HUD, which may be given or withheld in HUD’s sole discretion. In the event of a notification of default under the terms of the Borrower’s Security Instrument pursuant to which the Indebtedness has been accelerated, a written notification by HUD to Borrower of a violation of this Agreement, or at such other times as determined solely by HUD, HUD may direct the application of the balance in such account to the amount due on the Indebtedness as accelerated or for such other purposes as

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may be determined solely by HUD.

(e) Upon Borrower’s full satisfaction of all of its obligations under the Loan Documents, any monies remaining in the Reserve for Replacement account shall be released to Borrower or its designee.

(f) Borrower may, only with the advance written approval of HUD, borrow funds from the Reserve for Replacement for Reasonable Operating Expenses as provided in Program Obligations. Such funds shall be repaid to the Reserve for Replacement by Borrower pursuant to the terms approved by HUD prior to the making of such loan. To the extent HUD does not specify repayment requirements, Borrower shall repay the Reserve for Replacement in full within thirty (30) days of the approved withdrawal. If Borrower fails to timely make any repayment installment pursuant to the terms approved by HUD, upon notice from HUD, Borrower shall immediately repay the full amount of such loan from non-Project funds.

14. [RESERVED.]

15. SURPLUS CASH.

(a) Surplus Cash shall be calculated semi-annually, at the end of the first six months of the Borrower’s annual fiscal year, and at the end of the Borrower’s annual fiscal year. Each Surplus Cash calculation shall be submitted to Lender and HUD with the filing of Borrower’s Annual Financial Reports, unless otherwise required by HUD.

(b) “ Surplus Cash ” means any cash remaining after:

(i)
the payment of (1) all sums due or currently required to be paid by Borrower under the Loan Documents, including any required deposits into reserves; and (2) all of Borrower’s obligations relating to the Project other than those required to be paid under the Loan Documents, unless funds for such payments have been set aside or deferment of payment has been approved by HUD; and

(ii)
the segregation of all amounts required to be held in trust (e.g., tenant security deposits) and all amounts required to be held (segregated) in other restricted asset accounts of the Project (e.g., Reserve for Replacements) pursuant to this Agreement, the Loan Documents and Program Obligations.

16. DISTRIBUTIONS.

(a) Borrower may make and take Distributions of Mortgaged Property, to the extent and as permitted by the law of the applicable jurisdiction, pursuant to the restrictions below, including

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without limitation the reconciliation requirements set forth in Section 16(d); provided however that, except as may be approved by HUD or permitted under Program Obligations, or as otherwise provided in this Agreement, Distributions of Mortgaged Property are prohibited for Non-Profit Borrowers.

(b) Distributions shall not be made:

(i)
from borrowed funds (unless the Borrower is Operator and such Distribution is permitted under the Operator’s Regulatory Agreement and Program Obligations) or prior to the completion of the construction or rehabilitation of the Project;

(ii)
after HUD has given written notice to Borrower of a violation or default under this Agreement and/or after Lender has given written notice to Borrower of a violation or default under any of the Loan Documents, and until the terms of such notices of violation or default have been satisfied to the satisfaction of HUD and/or Lender, as applicable;

(iii)
when Borrower or the Project is under a forbearance agreement;

(iv)
If: (A) necessary services for the operation of the Healthcare Facility are not being provided on a regular basis, which failure Borrower knows or should have known about in the exercise of due care; (B) written notices of necessary physical repairs or deficiencies involving exigent or significant health or safety risks to residents in connection with the Project (including but not limited to building code violations) by other Governmental Authorities and/or by HUD have been issued and remain unresolved to the satisfaction of the issuing Governmental Authority, (C) Borrower has been notified in writing by HUD, Lender or other Governmental Authority that necessary physical repairs and/or deficiencies exist in connection with the Project and Borrower has not corrected or cured, or caused to be corrected or cured, the identified items to HUD’s satisfaction, (D) there remain any outstanding loans from the Reserve for Replacement or Residual Receipts account, or any required deposits to such accounts have not been made when due, or (E) the Reserve for Replacement account or any other required reserve does not have the minimum balance required by HUD; and/or

(v)
if the Borrower is also Operator, at any time that Operator is prohibited from distributing, advancing or otherwise using funds attributable to the Healthcare Facility (e.g., failure to timely file financial reports or when Healthcare Facility Working Capital is negative).

(c) Any Distribution of any funds, which the party receiving such funds is not entitled

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to retain hereunder, shall be returned to Borrower’s Project-related accounts immediately.

(d) Upon each required calculation of Surplus Cash, Borrower must demonstrate positive Surplus Cash, or to the extent Surplus Cash is negative, repay to Project-related accounts any Distributions taken during such calculation period. Such repayment must be made within thirty (30) days of the conclusion of the reporting period, or such longer period approved by HUD.

(e) If a Non-Profit Borrower has been permitted to take Distributions, as indicated on the first page of this Agreement, and to the extent the annual audited financial statement of such Non-Profit Borrower demonstrates Surplus Cash, such Non-Profit Borrower may make Distributions of such Surplus Cash, upon the following conditions:

(i)
Distributions may only be made after the end of any annual or semi-annual fiscal period, and when the Borrower can demonstrate positive Surplus Cash pursuant to Section 15, at the end of the immediately prior annual or semi-annual fiscal period;

(ii)
Operator is in good standing with the applicable licensing agency and has no open state compliance issues or special focus facility designation;

(iii)
No unresolved audit findings in the annual audited financial statements exist relating to the Project;

(iv)
Borrower and Operator are in compliance with the terms of this Agreement and the Operator’s Regulatory Agreement, respectively, with no notice of noncompliance or violation from HUD;

(v)
No defaults exist under any of the Loan Documents and all payments required by any of the Loan Documents are current, with no notice of noncompliance or violation from HUD; and

(vi)
The balance of the Residual Receipts account remains equal to no less than six months of the Borrower’s required debt service (including any mortgage insurance premium, escrow deposit, reserve deposits, or any other payments required by Borrower pursuant to the Loan Documents).
The Non-Profit Borrower making Distributions must evidence, with appropriate documentation sufficient for audit and HUD monitoring purposes, compliance with each condition listed above at the time such Distribution is made, and must retain such documentation in accordance with Program Obligations, for audit and HUD monitoring purposes.

17. RESIDUAL RECEIPTS.

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(a) Any Non-Profit Borrower shall establish and maintain a Residual Receipts account. Unless and until otherwise approved in writing by HUD, Residual Receipts and the Residual Receipts account shall be restricted as set forth in this Section 17. Within ninety (90) days after the end of the annual or semi-annual fiscal period for which Surplus Cash is calculated, Borrower shall deposit into the Residual Receipts account an amount equal to the excess, if any, of (i) Surplus Cash as of the end of such fiscal period over (ii) the amount of any permitted Distributions therefrom.

(b) Residual Receipts shall be deposited with Lender or in a safe and responsible depository designated by Lender in accordance with Program Obligations. Residual Receipts shall at all times remain under the control of Lender or Lender’s designee, whether in the form of a cash deposit or invested in obligations of, or fully guaranteed as to principal by, the United States of America or in such other investments as may be allowed by HUD and shall be held in accounts insured or guaranteed by a federal agency and in accordance with Program Obligations.

(c) Borrower shall carry the balance in such account on the financial records as a restricted asset. Residual Receipts shall be invested in accordance with Program Obligations, and any interest earned on the investment shall be deposited in the Residual Receipts account for use by the Project in accordance with this Section 17.

(d) Disbursements from such account shall only be made after consent, in writing, of HUD, which may be given or withheld in its sole discretion, provided that, if the Non-Profit Borrower has been permitted to take Distributions as indicated on the first page of this Agreement, then HUD shall apply the conditions enumerated in Section 16(e) in granting or withholding such consent. In the event of a notification of default under the terms of the Borrower’s Security Instrument, pursuant to which the Indebtedness has been accelerated, a written notification by HUD to Borrower of a violation of this Agreement or at such other times as determined solely by HUD, HUD may direct the application of the balance in such account to the amount due on the Indebtedness as accelerated or for such other purposes as may be determined solely by HUD.

(e) Upon Borrower’s full satisfaction of all its obligations under the Loan Documents, all funds remaining in the Residual Receipts account shall be released to the Borrower.

(f) Borrower may, only with the advance written approval of HUD, borrow funds from Residual Receipts for Reasonable Operating Expenses as provided in Program Obligations or for such other purposes as HUD may permit. Such funds shall be repaid to the Residual Receipts account pursuant to the terms approved by HUD prior to the making of such loan. To the extent HUD does not specify repayment requirements, Borrower shall repay the Residual Receipts account in full within thirty (30) days of the approved withdrawal. If Borrower fails to timely make any

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repayment installment pursuant to the terms approved by HUD, upon notice from HUD, Borrower shall immediately repay the full unrepaid amount of all such loan from non-Project funds.

18. ADVANCES.

(a) All advances made by Borrower (or by a member, partner, shareholder of Borrower, or other individual or entity acting on behalf of Borrower) for Reasonable Operating Expenses or otherwise for the benefit of the Project must be deposited into the Project’s operating account, or otherwise as directed by HUD, as required by Program Obligations.

(b) Interest may accrue, and be paid, on such advances pursuant to terms approved by HUD in advance in writing.

(c) Repayments of advances must be approved by HUD, or as otherwise provided in Program Obligations.

19. PROJECT RECORDS. Borrower shall:

(a) Make and keep books, records, and accounts, in such reasonable detail, so as to fully, accurately, and fairly reflect the activities of Borrower.

(b) Record the Project’s assets, liabilities, revenues, expenses, receipts and disbursements in separate accounts from any other assets, liabilities, revenues, expenses, receipts and disbursements of Borrower so as to permit the production of a Statement of Financial Position, a Statement of Profit and Loss (Statement of Activities), and a Statement of Cash Flows for Borrower in which the activities of Borrower are separately identifiable from the activities of the Operator, unless Borrower is also Operator.

(c) Devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that:

(i)
Transactions are executed, and access to assets is permitted, only in accordance with Borrower’s authorization;

(ii)
Transactions are accurately and timely recorded to permit the preparation of quarterly and annual financial reports in conformity with applicable Program Obligations;

(iii)
Transactions are timely recorded in sufficient detail so as to permit an efficient audit of the Borrower’s books and records in accordance with Generally Accepted Auditing Standards (GAAS), Generally Accepted Government Auditing Standards (GAGAS), and other applicable Program Obligations; and


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(iv)
Transactions are timely recorded in sufficient detail so as to maintain accountability of the Borrower’s assets. The recorded accountability for assets shall be compared with the existing assets at reasonable intervals, but not less than annually, and appropriate action shall be taken with respect to any differences.

(d) Make the books, records and accounts of Borrower available for inspection by HUD or its authorized representatives, after reasonable prior notice, during normal business hours, at the Project or other mutually agreeable location or, at HUD’s request, shall provide legible copies of such documents to HUD or its authorized representatives within a reasonable time after HUD or its authorized representative makes a request for such documents.
 
(e) Include as a requirement in any operating or management contract that the books, records, and accounts of any agent of Borrower, as they pertain to the operations of the Project, shall be kept in accordance with the requirements of this Section 19 and be available for examination by HUD or its authorized representatives after reasonable prior notice during customary business hours at the Project or other mutually agreeable location or, at HUD’s request, the Management Agent shall provide legible copies of such documents to HUD or its authorized representatives within a reasonable time after HUD or its authorized representative makes the request.

20. ANNUAL FINANCIAL REPORTS.

(a) For so long as any portion or portions of this Section 20 are not expressly waived or modified in writing by HUD, within ninety (90) days, or such longer period established in writing by HUD, following the end of each fiscal year, Borrower shall furnish HUD and Lender with a complete annual financial report of all of Borrower’s financial activities for the immediately preceding fiscal year, or for such other period as approved by HUD in writing, prepared in accordance with Generally Accepted Accounting Principles (GAAP). For purposes of this Section 20, where Borrower is also Operator, and without limiting the requirements for Operator’s submission of financial reports to HUD under the Operator’s Regulatory Agreement, financial activities of Borrower and the Project shall include all of the activities of both Borrower and Operator. To the extent any records or other information of the Project is held by Operator, or any management agent or Affiliate, Borrower shall cause such entity to provide such information to Borrower, Lender, and HUD, and every contract related to the Project with Operator, or any management agent or Affiliate, shall include the provision that such information shall be provided on demand. All annual financial reports furnished to HUD required herein shall be furnished in accordance with 24 C.F.R. 5.801 and other Program Obligations, and shall include a certification in content and form prescribed by HUD and certified by Borrower.

(b) In addition, except as otherwise provided in this Section 20, annual financial reports shall be audited in accordance with Generally Accepted Auditing Standards (GAAS) and Government Auditing Standards (GAS), and certified by a certified public accountant licensed or

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certified by a regulatory authority of a state or other political subdivision of the United States, which authority makes such certified public accountant subject to regulations, disciplinary measures, or codes of ethics prescribed by law. Such certified public accountant must have no business relationship with Borrower other than for the provision of tax consulting and return preparation and auditing services.

(c) Any Non-Profit Borrower shall submit audited annual financial reports, as applicable, pursuant to federal notice (e.g., Office of Management and Budget Circular A-133). However, notwithstanding any additional time provided for Non-Profit Borrowers to submit audited annual financial reports, such Borrowers shall still be required to submit unaudited annual financial reports pursuant to Section 20(a), except that, for Borrowers that elect to submit their required audited annual financial reports early (i.e. within the time specified in Section 20(a)), the requirement to submit unaudited annual financial reports shall be waived.

(d) If Borrower fails to submit any annual financial report required by this Section 20 within ninety (90) days of the required due date, HUD, at its sole election, and without relieving Borrower of its requirement to file such report, may thereafter examine, or cause to be examined at Borrower’s expense, the books and records of Borrower and the Project for purposes of preparing a report of the operations of the Project for HUD’s use.

(e) Auditing costs and tax return preparation costs may be charged as Reasonable Operating Expenses only to the extent they are required of Borrower itself by state law, the Internal Revenue Service (“ IRS ”), the Securities and Exchange Commission, or HUD. Neither IRS audit costs nor costs of tax return preparation for partners, members, shareholders, Principals or Affiliates of Borrower are considered Reasonable Operating Expenses.

IV. PROJECT MANAGEMENT.

21. PRESERVATION, MANAGEMENT AND MAINTENANCE OF THE MORTGAGED PROPERTY. Borrower (a) shall not commit or permit Waste, (b) shall not abandon the Mortgaged Property, (c) shall restore or repair promptly, or cause to be restored or repaired promptly, in a good and workmanlike manner, any damaged part of the Project to the equivalent of its original condition, or such other condition as HUD may approve in writing, whether or not litigation or insurance proceeds or condemnation awards are available to cover any costs of such restoration or repair, and (d) shall keep, or cause to be kept, the Project in decent, safe, sanitary condition and good repair, including the replacement of Personalty and Fixtures with items of equal or better function and quality. Obligations (a) through (d) of this Section 21 are absolute and unconditional and are not limited by any conditions precedent and are not contingent on the availability of financial assistance from HUD or on HUD’s performance of any administrative or contractual obligations. In the event all or any of the Improvements shall be destroyed or damaged by fire, by an exercise of the power of eminent domain, by failure of warranty, or other casualty, the money derived from any settlement, judgment, or insurance on any portion of the Project shall

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be applied in accordance with the terms of Program Obligations and the Borrower’s Security Instrument or as otherwise may be directed in writing by HUD.

22. FLOOD HAZARDS. Borrower shall maintain, or cause to be maintained, flood insurance as required by Program Obligations.

23. CONTRACTS FOR GOODS AND SERVICES. Consistent with Program Obligations, to the extent that Borrower obtains, or causes to be obtained, contracts for goods, materials, supplies, and services (“ Goods and Services ”) at costs, amounts, and terms that do not exceed reasonable and necessary levels and those customarily paid in the vicinity of the Land for Goods and Services received, the purchase price of Goods and Services shall be based on quality, durability and scope of work. Reasonable Operating Expenses do not include amounts paid for betterments as defined in the Property Jurisdiction or the Improvements unless determined by HUD to be prudent and appropriate. If the Borrower is acquiring goods and services whose costs exceed five percent (5.00%) of the Healthcare Facility’s gross annual revenue, Borrower shall solicit written cost estimates. Borrower shall keep copies of all written cost estimates and contracts or other instruments relating to the Project, all or any of which may be subject to inspection and examination by HUD at the Project or other mutually agreeable location.

24. RESPONSIVENESS TO INQUIRIES. At the request of HUD, Borrower shall promptly furnish or cause to be furnished operating budgets and occupancy, accounting and other reports (including credit reports) and give or cause to be given specific answers to questions relative to income, assets, liabilities, contracts, operation, and conditions of the Project and the status of the Borrower’s Security Instrument.

25. PERMITS AND APPROVALS.

(a) Borrower shall at all times cause Operator, or any lessee or management agent, as applicable, to maintain in full force and effect, all appropriate certificates of need, bed authority, provider agreements, licenses, permits and approvals reasonably necessary to operate the Healthcare Facility or to fund the operation of the Project for the Approved Use (collectively, the “ Permits and Approvals ”). Without the prior written consent of HUD, none of the Permits and Approvals shall be conveyed, assigned, encumbered, transferred or alienated from the Healthcare Facility or the Project (nor shall they be relinquished to any licensing or certification authority). Borrower shall ensure that the Healthcare Facility and the Project are at all times operated in accordance with the requirements of the Permits and Approvals.

(b) The security interest referred to in Section 27 below shall constitute, to the extent permitted by law, a first lien upon all of the rights, titles and interests of Borrower, if any, in the Permits and Approvals. However, in the event of either a monetary or other default under this Agreement, the Note, the Borrower’s Security Instrument, or any of the other Loan Documents, the Borrower shall cooperate in any legal and lawful manner necessary or required to permit the

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continued operation of the Healthcare Facility for the Approved Use. For the intents and purposes herein, Borrower hereby irrevocably nominates and appoints Lender and HUD, their respective successors and assigns, each in its own capacity, as Borrower’s attorney-in-fact coupled with an interest to do all things that any such attorney-in-fact deems to be necessary or appropriate in order to facilitate the continued operation of the Healthcare Facility and the Project for the Approved Use, including but not limited to, the power and authority to provide any and all information and data, pay such fees as may be required, and execute and sign in the name of Borrower, its successors or assigns, any and all documents, as may be required by any Governmental Authority exercising jurisdiction over the Project.

(c) Borrower shall not alter, terminate or relinquish or suffer or permit the alteration, termination or relinquishment of any Permits and Approvals without the prior written approval of HUD. In the event that any such alteration, termination or relinquishment is proposed, upon learning of such proposed alteration, termination or relinquishment, Borrower shall advise HUD and Lender promptly. Borrower shall insert the foregoing requirements into any Borrower-Operator Agreement for the Project.

(d) Except as otherwise provided below or in Program Obligations, Borrower shall electronically deliver within two (2) Business Days after Borrower’s receipt thereof, to the assigned HUD personnel and Lender copies of any and all notices, reports, surveys and other correspondence (regardless of form) received by Borrower from any Governmental Authority that includes any statement, finding or assertion that (i) Borrower, Operator, the Project or any lessee or management agent of the Project is or may be in violation of (or default under) any of the Permits and Approvals or any governmental requirements applicable thereto, (ii) any of the Permits and Approvals are to be terminated, limited in any way, or not renewed, (iii) any civil money penalty relating to the Project is being imposed with respect to the Healthcare Facility, or (iv) Borrower, Operator, the Project or any lessee or management agent of the Project is subject to any governmental investigation or inquiry involving fraud. Borrower shall deliver to the assigned HUD personnel and Lender, simultaneously with delivery thereof to any Governmental Authority, any and all responses given by or on behalf of Borrower to any of the foregoing and shall provide to HUD and Lender, promptly upon request, such other information regarding any of the foregoing as HUD or Lender may request. Unless otherwise requested by HUD, the reporting requirement of this provision shall not encompass regulators’ communications relating solely to Licensed Nursing Facility surveys where the most severe citation level is at the “ G ” level or its equivalent (pursuant to CMS State Operations Manual, Chapter 7, as may hereafter be edited or updated, or any successor guidance) unless a citation at such level is either (i) unresolved from the two most recent consecutive prior surveys, or (ii) is a repeat violation having the same citation number. Moreover, unless otherwise requested by HUD or Lender, the initial communication from the Operator pursuant to this paragraph shall be a notice by email to the Lender describing the conduct cited, the scope and duration of remedy(ies) imposed, and the timelines for corrective actions. Then, unless otherwise requested by HUD or Lender, the next communication from the Operator shall be notification that the citations have been cleared by the issuing regulatory agency. The receipt by HUD and/or Lender of notices, reports, surveys,

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correspondence and other information shall not in any way impose any obligation or liability on HUD, the Lender or their respective agents, representatives or designees to take or refrain from taking any action, and HUD, Lender and their respective agents, representatives and designees shall have no liability for any failure to act thereon or as a result thereof.

26. Operator; Cooperation in Change of Operator.

(a) Unless Borrower is itself the licensed operator of the Healthcare Facility, Borrower has or shall enter into and maintain [the Borrower-Operator Agreement] the Master Lease, and shall cause Master Tenant to enter into and maintain the Borrower-Operator Agreement, in such form as approved by HUD. Any Operator (including Borrower) must be approved by HUD and shall execute a Healthcare Regulatory Agreement - Operator (Form HUD-92466A-ORCF) upon such terms as are acceptable to HUD and an Operator Security Agreement (Form HUD-92323-ORCF) and deposit account control agreements in form and substance satisfactory to HUD and Lender. If Borrower is or becomes Operator, Borrower shall execute a Healthcare Regulatory Agreement - Operator (Form HUD-92466A-ORCF) upon terms acceptable to HUD and an Operator Security Agreement (Form HUD-92323-ORCF) and deposit account control agreements in form and substance satisfactory to HUD and Lender.

(b) Borrower shall require Operator to comply with the terms of the Operator’s Regulatory Agreement and shall set forth such requirements, or cause such requirements to be set forth, in any Borrower-Operator Agreement. Borrower shall require Master Tenant to comply with the terms of the Master Tenant’s Regulatory Agreement and shall set forth such requirements in any Master Lease.

(c) In the event that, consistent with the Operator’s Regulatory Agreement and/or Master Tenant’s Regulatory Agreement, HUD directs Borrower and/or Master Tenant to terminate any Borrower-Operator Agreement and/or Master Lease and procure a new Operator acceptable to HUD, Borrower shall expeditiously do so consistent with the continued operation of the Healthcare Facility for the Approved Use, and in cooperation with and subject to the requirements of the necessary regulatory and/or funding entities. Doing so shall in no way obviate the Borrower’s obligation to comply with all other terms of this Agreement or affect any enforcement action by HUD.

(d) In the event that Borrower is itself the licensed operator of the Healthcare Facility and HUD determines that (i) any of the Permits and Approvals have been or are at substantial and imminent risk of being terminated, suspended or otherwise restricted in such a way that the Project could not be operated for the Approved Use, as evidenced by, without limitation, letters of warning or imposition of penalties from applicable state and/or federal regulatory and/or funding agencies, or (ii) the financial viability of the Healthcare Facility is at substantial and imminent risk, then, pursuant to Program Obligations and without prejudice to any enforcement actions otherwise set

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forth in this Agreement, HUD may direct Borrower to retain the services of an operator acceptable to HUD. Upon such direction from HUD, Borrower shall expeditiously do so.

(e) Without prior approval of HUD, [the Operator Lease shall not, and may not be amended to] neither the Operator Lease nor the Master Lease shall or shall be amended to contain any provisions that cause such lease to be characterized as other than an “operating lease” pursuant to Generally Accepted Accounting Principles and FASB Standard 13 (or its successor), including without limitation provisions that convey an ownership interest in the Project to Operator or Master Tenant, as applicable, or grant Operator or Master Tenant, as applicable, a bargain purchase option during or after the lease term. Nothing herein shall be construed as prohibiting Borrower from granting an Operator or Master Tenant, as applicable, an option to purchase the Project on arms-length negotiated terms, provided that such terms do not cause the Operator Lease to be characterized as something other than an “operating lease” for accounting purposes and provided such option provides that the exercising of same is subject to the prior satisfaction of applicable Program Obligations, including those relating to the transfer of physical assets.

27. Personal Property; Security Interests. Borrower shall suitably equip, or cause to be equipped, the Project for the Approved Use. Except as otherwise approved in writing by HUD, Borrower shall grant to Lender and HUD a first lien security interest in all personal property of Borrower related to the Project as additional security for the obligations of Borrower under the Note, the Borrower’s Security Instrument and this Agreement. Such security interest shall be evidenced by such security agreements as Lender and/or HUD may require and, in connection therewith, Borrower shall execute or cause to be executed and delivered such deposit account control agreements as may be required by Lender and/or HUD. Borrower hereby authorizes each of Lender and HUD to file such UCC financing statements, amendments, and continuation statements as either of them may deem to be necessary or appropriate in connection with the foregoing security interests. Borrower shall not be permitted to grant any other liens on any of the Mortgaged Property without the prior written approval of Lender and HUD.

28. Professional Liability Insurance. Borrower shall maintain, or cause Operator or any lessee or management agent to maintain, professional liability insurance that complies with the applicable requirements of HUD. Annually, Borrower shall provide, or cause Operator or any lessee or management agent to provide, to HUD and Lender, a certification of compliance with such professional liability insurance requirements as evidenced by an Acord or certified copy of the insurance policy.

29. PROPERTY MANAGEMENT AGREEMENTS . If, in addition to or in lieu of any Borrower-Operator Agreement, Borrower enters into a property management agreement or other document outlining procedures for managing the Healthcare Facility (“Management Agreement”), such agreement or document must be approved by HUD and consistent with Program Obligations. Any management agent must be approved by HUD and must execute and deliver a

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Management Agent Certification - Residential Care Facilities (form HUD-9839-ORCF, or successor form) in such form as approved by HUD. Any Management Agreement shall contain the following provisions: (1) the Management Agreement shall terminate without penalty upon failure to comply with the provisions of Management Certification to HUD, or for other good cause, including without limitation for violations of the Borrower’s Regulatory Agreement, Operator’s Regulatory Agreement, and/or Master Tenant’s Regulatory Agreement, if any, thirty days after HUD has mailed to Borrower, or Operator, as applicable, a written notice of its desire to terminate the Management Agreement; (2) in the event that HUD determines that any of the Permits and Approvals reasonably necessary to operate the Healthcare Facility is at substantial and imminent risk of being terminated, suspended or otherwise restricted, if such termination, suspension or other restriction would have a materially adverse effect on the Project, the Management Agreement shall terminate immediately without penalty upon HUD’s issuance of a notice of termination to Borrower, or Operator, as applicable, and such management agent; and (3) the Management Agreement may not be assigned without the prior written approval of HUD. Upon HUD’s request for termination, Borrower, or Operator, as applicable, shall immediately arrange to terminate any such Management Agreement and shall make arrangements satisfactory to HUD for the continuing proper management of the Healthcare Facility and the Project. Any material amendment to the management agreement must be acceptable to HUD, in accordance with Program Obligations.

30. ACCEPTABILITY OF MANAGEMENT OF THE MORTGAGED PROPERTY . Borrower shall provide management of the Mortgaged Property in a manner consistent with Program Obligations and acceptable to HUD. Borrower shall take such actions as shall cause the Project to conform to Program Obligations.

31. TERMINATION OF CONTRACTS . Except as otherwise permitted by HUD, any contract pertaining to the Project with a vendor having an identity of interest with the Borrower and/or Operator, as determined by HUD pursuant to Program Obligations, shall provide: (1) in the event of a default under this Agreement, Master Tenant’s Regulatory Agreement, or the Operator’s Regulatory Agreement, the contract shall be subject to termination without penalty and without cause upon written request by HUD, within thirty (30) days notice of such termination; and (2) in the event that HUD determines that any of the Permits and Approvals are at substantial and imminent risk of being terminated, suspended or otherwise restricted so as to have a material adverse effect on the Project, the contract shall be subject to termination immediately without penalty and without cause upon written request by HUD. Upon such request by HUD, Borrower shall immediately arrange to terminate the contract, or cause Operator to terminate the contract, and Borrower shall also make arrangements, or cause Operator to make arrangements, satisfactory to HUD for continuing acceptable services to the Project effective as of the termination date of the contract.

32. MANAGEMENT AGENT. In the event that a management agent is or will be the holder of the Healthcare Facility license or is or will be the payee under one or more third-party

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payor agreements with respect to the Healthcare Facility, such management agent will be treated as an Operator in accordance with Program Obligations.

33. COMMERCIAL (NON-RESIDENTIAL) LEASES . No portion of the Project shall be leased for any commercial purpose or use without receiving HUD’s prior written approval as to terms, form and amount, except for commercial leases for support or ancillary services which are subordinate to the Borrower’s Security Instrument, have terms of not more than five (5) years and otherwise comply with Program Obligations. Borrower shall deliver, or cause to be delivered, an executed copy of any commercial lease to HUD and Lender within thirty (30) days after its effective date.

V. ACTIONS REQUIRING THE PRIOR WRITTEN APPROVAL OF HUD.

34. Borrower shall not without the prior written approval of HUD, including without limitation in accordance with Program Obligations:

(a) Convey, assign, transfer, pledge, hypothecate, encumber, or otherwise dispose of the Mortgaged Property or any interest therein, or permit the conveyance, assignment, or transfer of any interest or control in Borrower (if the effect of such conveyance, assignment or transfer is the creation or elimination of a Principal) unless permitted by Program Obligations. Borrower need not obtain the prior written approval of HUD for: (i) conveyance of the Mortgaged Property at a judicial or non-judicial foreclosure sale under the Borrower’s Security Instrument; (ii) inclusion of the Mortgaged Property in a bankruptcy estate by operation of law under the United States Bankruptcy Code; (iii) acquisition of an interest by inheritance or by court decree; or (iv) as otherwise allowed by Program Obligations.

(b) Enter into any contract, agreement or arrangement to borrow funds or finance any purchase or incur any liability, direct or contingent, other than in accordance with the Loan Documents and Program Obligations.

(c) Pay out any funds in violation of this Agreement, the Loan Documents, or Program Obligations.

(d) In accordance with 24 C.F.R. 232.1007 or any successor regulation, except for Distributions allowed pursuant to this Agreement, pay any compensation, including wages or salaries, in excess of fair and reasonable compensation or incur any obligation to do so, to any officer, director, stockholder, trustee, beneficiary, partner, member, or Principal of Borrower, or to any nominee thereof, except that, at any time at which Borrower is the operator of the Healthcare Facility, Borrower may pay fair and reasonable compensation to employees who are officers, directors, stockholders, trustees, beneficiaries, partners, members or Principals of Borrower.

(e) Enter into or change any contract, agreement or arrangement for supervisory or

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managerial services or leases for the operation of the Healthcare Facility or any portion of the Project, except as permitted under Program Obligations.

(f) Convey, assign or transfer any right to receive Rents of the Mortgaged Property.

(g) Remodel, add to, subtract from, construct, reconstruct or demolish any part of the Project, except as required by HUD under Section 21(c) and except that Borrower may, without approval of HUD, (i) dispose of or cause to be disposed of obsolete or deteriorated Fixtures or Personalty if the same are replaced with like items of the same or greater quality or value (provided, that Borrower shall have no obligation to replace any such Fixtures or Personalty that are not needed for operation of the Project) and (ii) make minor alterations that do not adversely affect the Mortgaged Property.

(h) Permit the use of the Project, including any portion of the Healthcare Facility, for any other purpose except the Approved Use, or permit commercial use greater than that originally approved by HUD.

(i) Amend the organizational documents of Borrower in such a way that modifies the terms of the organizational documents required by HUD, Lender, and/or Program Obligations, including, but not limited to: (i) any amendment that results in the creation or elimination of a Principal or modifies the requirements regarding the filing of a HUD previous participation certification when required by Program Obligations; (ii) any amendment that in any way affects the Loan Documents; (iii) any amendment that would change the identity of the persons and/or entities authorized to bind Borrower previously approved by HUD or pre-approve a successor general partner, manager or member to bind the partnership or company for any matters concerning the Project which require HUD’s consent or approval; (iv) a change in any general partner, manager or managing member or pre-approved successor general partner, manager or managing member of the partnership or company or any change in a guarantor of any obligation to HUD; and (v) any proposed changes to the mandatory HUD language included in the organizational documents. Copies of all fully executed amendments to the organizational documents must be provided to HUD within ten (10) days of the effective date of the amendment. If the amendments to the organizational documents are recorded, copies of the recorded documents must be provided to HUD within ten (10) days of receipt by Borrower.

(j) Except in cases funded by proceeds from professional liability insurance, institute litigation seeking the recovery of a sum in excess of $100,000, nor settle or compromise any action for specific performance, damages, or other equitable relief, in excess of $100,000; and in all cases dispose of or distribute the proceeds thereof.

(k) Reimburse any party from the Mortgaged Property for payment of expenses or costs of the Project except for Reasonable Operating Expenses and except for payments by means of Distributions.


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(l) Receive any fee or payment of any kind from Operator or any management agent or employee of the Project, or other provider of Goods or Services of the Project in exchange for the right to provide such Goods or Services.

(m) Except as provided in Section 33, enter into, or agree to the assignment of, any commercial lease for all or part of the Mortgaged Property.

(n) Enter into any amendment of any contract or lease relating to the Project, except to the extent such contract or lease does not require HUD’s approval, including without limitation any amendment that (i) reduces the rent or other payments due to Borrower, (ii) materially increases the obligations of Borrower or the rights of the other parties to such contract or lease, (iii) materially decreases the rights of Borrower or the obligations of the other parties to such contract or lease, or (iv) alters any provision of such contract or lease required by HUD to be included therein.

VI. ENFORCEMENT.

35. VIOLATION OF AGREEMENT. The occurrence of any one or more of the following shall constitute a “ Violation ” under this Agreement:

(a) Any failure by Borrower to comply with any of the provisions of this Agreement;

(b) Any failure by Borrower to comply with any of the provisions of any other of the Loan Documents;

(c) Any fraud or material misrepresentation or material omission by Borrower, any of its officers, directors, trustees, general partners, members, managers, employees, representatives or managing agent in connection with (1) any financial statement, rent roll or other report or information provided to HUD during the term of this Agreement or (2) any request for HUD’s consent to any proposed action, including a request for disbursement of funds from any restricted account for which HUD’s prior written approval is required; or

(d) The commencement of a forfeiture action or proceeding, whether civil or criminal, which, in HUD’s reasonable judgment, could result in a forfeiture of the Mortgaged Property or otherwise materially impair Lender’s and/or HUD’s interest in the Mortgaged Property.


36. NOTICE OF VIOLATION AND EVENT OF DEFAULT.

(a) At any time during the existence of a Violation, HUD may give written notice of such Violation to Borrower (the “ Violation Notice ”), addressed to the addresses stated in this Agreement, or such other addresses as may subsequently, upon appropriate written Notice to HUD

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and Lender, be designated by Borrower as its legal business address. Borrower shall have thirty (30) days to cure, or cause to be cured, any Violation described in the Violation Notice, provided that HUD shall extend such thirty (30) day period by such time as HUD may reasonably determine is necessary to correct the Violation for so long as, HUD determines, in its discretion, that: (i) Borrower is timely satisfying all payment obligations in the Loan Documents; (ii) none of the Permits and Approvals is at substantial and imminent risk of being terminated; (iii) such violation cannot reasonably be corrected during such thirty (30) day period, but can reasonably be corrected in a timely manner, and (iv) Borrower, Master Tenant, or Operator commences to correct such Violation, or cause such correction to be commenced, during such thirty (30) day period and thereafter diligently and continuously proceeds to correct, or cause correction of, such Violation. If, after delivery of such Violation Notice and applicable cure period, the Violation is not corrected to the satisfaction of HUD, HUD may declare an Event of Default under this Agreement without further Notice. Alternatively, if necessary in HUD’s determination to protect the health and safety of the tenants or the financial or operational viability of the Healthcare Facility, HUD may declare an Event of Default at any time during the existence of a Violation without providing prior written notice of the Violation.

(b) Notwithstanding any other provisions of this Agreement, if HUD determines at any time that any of the Permits and Approvals are at substantial and imminent risk of being terminated, suspended or otherwise restricted if such termination, suspension, or other restriction would have a materially adverse effect on the Project, including without limitation, HUD’s determination that there is a substantial risk that deficiencies identified by applicable state and/or federal regulatory and/or funding agencies cannot be cured in such manner and within such time periods as would avoid the loss, suspension, or diminution of any of the Permits and Approvals that would have a materially adverse effect on the Project, or if HUD determines at any time that, as a result of a Violation, the value of the Mortgaged Property is at substantial and imminent risk of material adverse diminution, then HUD may immediately (without thirty (30) days notice) declare an Event of Default of this Agreement and may immediately proceed to take actions to pursue its remedies.

(c) Upon any declaration of an Event of Default, HUD may:

(i)
If HUD holds the Note, declare the whole of the Indebtedness immediately due and payable and then proceed with the foreclosure of the Borrower’s Security Instrument or otherwise dispose of HUD’s interest in the Note and the Borrower’s Security Instrument pursuant to Program Obligations;

(ii)
If the Note is not held by HUD, notify the holder of the Note of such default and require the holder to declare a default under the Note and the Borrower’s Security Instrument, and the holder after receiving such Notice and demand, shall declare the whole of the Indebtedness due and payable and thereupon proceed with foreclosure of the Borrower’s Security Instrument and/or the exercise of other remedies available to Lender under the Loan Documents

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or at law or equity, or assign the Note and the Borrower’s Security Instrument to HUD as provided in Program Obligations. Upon assignment of the Note and the Borrower’s Security Instrument to HUD, HUD may then proceed with the foreclosure of the Borrower’s Security Instrument or otherwise dispose of HUD’s interest in the Note and the Borrower’s Security Instrument pursuant to Program Obligations;

(iii)
Collect all Rents and charges in connection with the Project or the operation of the Healthcare Facility, to the extent permitted by applicable law, and use such collections to pay obligations of Borrower under this Agreement and under the Note and the Loan Documents and the necessary expenses of preserving and operating the Project;

(iv)
Take possession of the Mortgaged Property, bring any action necessary to enforce any rights of Borrower growing out of the Mortgaged Property’s operation, and maintain the Mortgaged Property in decent, safe, sanitary condition and good repair;

(v)
Apply to any court, state or federal, for specific performance of this Agreement, for an injunction against any Violations of this Agreement, for the appointment of a receiver to take over and operate the Project in accordance with the terms of this Agreement, or for such other relief as may be appropriate, as the injury to HUD arising from a default under any of the terms of this Agreement would be irreparable and the amount of damage would be difficult to ascertain; and,

(vi)
Collect reasonable attorney fees related to enforcing Borrower’s compliance with this Agreement.

(d) Any forbearance by HUD in exercising any right or remedy under this Agreement or otherwise afforded by applicable law shall not be a waiver of or preclude the exercise of any right or remedy.

(e) HUD agrees to honor the provisions of [Sections 4, 5, and 7 of that certain Master Lease Subordination, Non-Disturbance and Attornment Agreement] Section 5 of that certain Master Lease Subordination Agreement relating to the Project by and between Lender and Borrower, among others, insofar as such sections call for HUD’s consent for the release of the Project from the Master Lease and/or the Loan Documents, on the terms and subject to the limitations set forth in such sections.

37. MEASURE OF DAMAGES. The damage to HUD as a result of Borrower’s breach of duties and obligations under this Agreement shall be, in the case of failure to maintain, or cause to be maintained, the Project as required by this Agreement, the cost of the repairs required to return

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the Project to decent, safe and sanitary condition and good repair. This contractual provision shall not abrogate or limit any other remedy or measure of damages available to HUD under any civil, criminal or common law.



[ REMAINDER OF PAGE INTENTIONALLY LEFT BLANK. AGREEMENT CONTINUES ]

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38. NONRECOURSE DEBT. The following individuals or entities identified in the Firm Commitment: ADCARE HEALTH SYSTEMS, INC., a Georgia corporation , as identified in the Firm Commitment does not assume personal liability for payments due under the Note and the Borrower’s Security Instrument, or for the payments to the Reserve for Replacement, or for matters not under its control, provided that each said individual or entity shall remain personally liable under this Agreement only with respect to the matters hereinafter stated; namely: (a) for funds or property of the Project coming into its hands which, by the provisions of this Agreement, it is not entitled to retain; (b) for authorizing the conveyance, assignment, transfer, pledge, encumbrance, or other disposition of the Mortgaged Property or any interest therein in violation of this Agreement without the prior written approval of HUD; and (c) for its own acts and deeds, or acts and deeds of others, which it has authorized in violation of the provisions of this Section. The obligations of the individuals or entities listed in this Section shall survive any foreclosure proceeding, any foreclosure sale, any delivery of any deed in lieu of foreclosure, any termination of this Agreement, and any release of record of the Borrower’s Security Instrument.

ADCARE HEALTH SYSTEMS, INC.,
 
 
a Georgia corporation
 
 
 
By:
  /s/ Ronald W. Fleming
 
 
 
Name:
Ronald W. Fleming
 
 
 
Its:
Chief Financial Officer
 
 
 
 
 
 
 
 
STATE OF GEORGIA
)
 
 
 
 
) ss:
 
 
COUNTY OF FULTON
)
 
 
    
On this 12th day of SEPTEMBER, 2014, before me, the undersigned, a Notary Public in and for said State, personally appeared RONALD W. FLEMING, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her capacity, and that by his/her signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument.

[SEAL]
 
 
  /s/ Ellen W. Smith
 
 
Notary Public
My Commission Expires:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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VII. MISCELLANEOUS.

39. COMPLIANCE WITH LAWS.

(a) Borrower shall comply with all applicable: laws; ordinances; regulations; requirements of any Governmental Authority; lawful covenants and agreements (including the Borrower’s Security Instrument) recorded against the Mortgaged Property; and Program Obligations; including but not limited to those of the foregoing pertaining to: health and safety; construction of improvements on the Mortgaged Property; fair housing; civil rights; zoning and land use; Leases; lead-based paint maintenance requirements of 24 C.F.R. Part 35 and maintenance and disposition of resident security deposits; and, with respect to all of the foregoing, all subsequent amendments, revisions, promulgations or enactments. Borrower shall at all times maintain records sufficient to demonstrate compliance with the provisions of this Section 39. Borrower shall take appropriate measures to prevent, and shall not engage in or knowingly permit, any illegal activities at the Mortgaged Property including those that could endanger residents or visitors, result in damage to the Mortgaged Property, result in forfeiture of the Mortgaged Property, or otherwise impair the lien created by the Borrower’s Security Instrument or Lender’s interest in the Mortgaged Property. To the best of Borrower’s knowledge, Borrower represents and warrants to HUD that no portion of the Mortgaged Property has been or shall be purchased with the proceeds of any illegal activity.

(b) There shall be full compliance with the provisions of (1) any State or local laws prohibiting discrimination in housing on the basis of race, color, creed, or national origin; and (2) the regulations of HUD providing for non-discrimination and equal opportunity in housing. It is understood and agreed that failure or refusal to comply with any such provisions shall be a proper basis for HUD to take any corrective action it may deem necessary including, but not limited to, the rejection of applications for FHA mortgage insurance and the refusal to enter into future contracts of any kind with which Borrower is identified; and further, if Borrower is a corporation or any other type of business association or organization which may fail or refuse to comply with the aforementioned provisions, HUD shall have a similar right of corrective action (1) with respect to any individuals who are officers, directors, trustees, managers, partners, associates or principal stockholders of Borrower; and (2) with respect to any other type of business association, or organization with which the officers, directors, trustee, managers, partners, associates or principal stockholders of Borrower may be identified.

(c) HUD and Lender shall be entitled to invoke any remedies available by law or equity to redress any breach or to compel compliance by Borrower with these requirements, including any remedies available hereunder.

40. BINDING EFFECT. This Agreement shall bind, and the benefits shall inure to, Borrower, its heirs, legal representative, executors, administrators, successors in office or interest, and assigns, and to HUD and HUD’s successors, so long as the Contract of Insurance continues in

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effect, and during such further time as HUD shall be Lender, holder, coinsurer, or reinsurer of the Borrower’s Security Instrument, or obligated to reinsure the Note or the Borrower’s Security Instrument.

41. PARAMOUNT RIGHTS AND OBLIGATIONS. Borrower warrants that it has not, and shall not, execute any other agreement with provisions contradictory of, or in opposition to, the provisions hereof, and that, in any event, the requirements of this Agreement are paramount and controlling as to the rights and obligations set forth and supersede any other requirements in conflict therewith.

42. SEVERABILITY. The invalidity of any clause, part, or provision of this Agreement shall not affect the validity of the remaining portions hereof.

43. RULES OF CONSTRUCTION. The captions and headings of the sections of this Agreement are for convenience only and shall be disregarded in construing this Agreement. Any reference in this Agreement to an “ Exhibit ” or a “ Section ” shall, unless otherwise explicitly provided, be construed as referring, respectively, to an Exhibit attached to this Agreement or to a Section of this Agreement. All Exhibits attached to or referred to in this Agreement are incorporated by reference into this Agreement. Use of the singular in this Agreement includes the plural and use of the plural includes the singular. As used in this Agreement, the term, “including” means “including, but not limited to.”

44. PRESENT ASSIGNMENT. To the extent permitted by applicable law, Borrower irrevocably and unconditionally assigns, pledges, mortgages and transfers to HUD its rights to Rents, charges, fees, carrying charges, Project accounts, security deposits, and other revenues and receipts of whatsoever sort that it may receive or be entitled to receive from the operation of the Mortgaged Property, subject to the assignment of Rents and other provisions in the Borrower’s Security Instrument and, if Borrower is also Operator, subject to the rights of any accounts receivable lender under accounts receivable financing that has been approved by HUD. Until a default is declared under this Agreement, a revocable license is granted to Borrower to collect and retain such Rents, charges, fees, carrying charges, Project accounts, security deposits, and other revenues and receipts, but upon an Event of Default under this Agreement or under the Borrower’s Security Instrument, such revocable license is automatically terminated.

45. WETLANDS RESTRICTION. While any mortgage insured by HUD is in effect, Borrower shall not develop any area of the Mortgaged Property that qualifies as a wetland by the U.S. Army Corps of Engineers 1989 delineation procedures of the U.S. Fish and Wildlife Service “Classification of Wetlands and Deepwater Habitats of the United States” without first obtaining the consent of HUD and any applicable federal, state, or local permits. Please note that this definition includes wetlands that are not defined as jurisdictional under Section 404 of the Clean Water Act and is to be interpreted consistent with 24 CFR Part 55.

46. NOTICE.

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(a) All notices, demands and other communications (“ Notice ”) under or concerning this Agreement shall be in writing. A courtesy copy of any Notice given by Borrower or HUD shall be sent simultaneously to Lender. Each Notice shall be addressed to the intended recipients at their respective addresses set forth below, and shall be deemed given on the earliest to occur of (i) the date when the Notice is received by the addressee; (ii) the first or second Business Day after the Notice is delivered to a recognized overnight courier service, with arrangements made for payment of charges for next or second Business Day delivery, respectively, or (iii) the third Business Day after the Notice is deposited in the United States mail with postage prepaid, certified mail, return receipt requested. As used in this Section 45, the term “ Business Day ” means any day other than a Saturday or a Sunday, a federal holiday or holiday in the state where the Project is located or other day on which the federal government or the government of the state where the Project is located is not open for business. When not specifically designated as a Business Day, the term “ day ” shall refer to a calendar day.

(b) Any party to this Agreement and Lender may change the address to which Notices intended for it are to be directed by means of Notice given to the other party in accordance with this Section 45. Each party agrees that it shall not refuse or reject delivery of any Notice given in accordance with this Section 45, that it shall acknowledge, in writing, the receipt of any Notice upon request by the other party and that any Notice rejected or refused by it shall be deemed for purposes of this Section 45 to have been received by the rejecting party on the date so refused or rejected, as conclusively established by the records of the U.S. Postal Service or the courier service.

BORROWER:
WOODLAND MANOR PROPERTY HOLDINGS, LLC
 
1145 Hembree Rd.
 
Roswell, GA 30076
 
Attention: Manager
 
 
HUD:
FEDERAL HOUSING COMMISSIONER
 
U.S. Department of Housing and Urban Development
 
Office of Residential Care Facilities
 
451 Seventh St. SW
 
Washington, DC 20410
 
 
LENDER:
HOUSING & HEALTHCARE FINANCE, LLC
 
2 Wisconsin Circle, Ste. 540
 
Chevy Chase, Maryland 20815
 
Attention: Erik Lindenauer, Director

[ SIGNATURE PAGES FOLLOW ]

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IN WITNESS WHEREOF , the parties hereto have set their hands and seals on to be effective as of the date first herein above written.

Borrower hereby certifies that the statements and representations contained in this instrument and all supporting documentation thereto are true, accurate, and complete and that each signatory has read and understands the terms of this instrument. This instrument has been made, presented, and delivered for the purpose of influencing an official action of HUD in insuring the Loan, and may be relied upon by HUD as a true statement of the facts contained therein.

 
WOODLAND MANOR PROPERTY HOLDINGS, LLC,
 
a Georgia limited liability company
 
 
 
 
 
 
By:
  /s/ Ronald W. Fleming
 
 
 
Name:
Ronald W. Fleming
 
 
 
Title:
Manager
 
 
 
 
 
 
 
STATE OF GEORGIA
)
 
 
 
 
) ss:
 
 
 
COUNTY OF FULTON
)
 
 
 

On this 12th day of SEPTEMBER, 2014, before me, the undersigned, a Notary Public in and for said State, personally appeared RONALD W. FLEMING, the MANAGER of WOODLAND MANOR PROPERTY HOLDINGS, LLC, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument.

[SEAL]
 
 
  /s/ Ellen W. Smith
 
 
Notary Public
My Commission Expires:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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Secretary of Housing and Urban Development , acting by and through the Federal Housing Commissioner


 
 
By:
  /s/ Timothy P. Gruenes
 
 
 
Timothy P. Gruenes
 
 
 
 
Authorized Agent
 
 
 
 
Office of Residential Care Facilities

    
ACKNOWLEDGEMENT

STATE OF MINNESOTA
)
 
 
 
 
) ss:
 
 
 
COUNTY OF HENNEPIN
)
 
 
 

The foregoing instrument was acknowledged before me on 18th day of SEPTEMBER, 2014 by TIMOTHY P. GRUENES as duly authorized agent for the Secretary of the U.S. Department of Housing and Urban Development, acting by and through the Federal Housing Commissioner, and a Supervisory Account Executive in the Office of Residential Care Facilities, U.S. Department of Housing and Urban Development, and that he, being authorized to do so by virtue of such office, executed the foregoing instrument on behalf of the Federal Housing Commissioner, acting for the Secretary of the U.S. Department of Housing and Urban Development.
                        
[SEAL]
 
 
/s/ Miranda J. Schoenecker
 
 
 
 
Notary Public
 
 
 
 
(Print Name)
Miranda J. Schoenecker
 
 
 
 
 
 
 
HUD/OHP
 
Title (and rank)
 
 
 
 
 
My commission expires:
31 Jan 2016
 
 

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EXHIBIT A


Real property in the City of Springfield, County of Clark, State of Ohio, described as follows:

Parcel I:

Lying in Section 20, Town 5, Range 10, City of Springfield, Moorefield Township, Clark County, Ohio.

Being all of that tract of land in the name of Woodland Manor Limited Partnership, an Ohio limited partnership, as deeded and described in Official Record Book 423, Page 345 of the Clark County records of deeds and being more particularly described as follows:

Beginning for reference at a PK nail set over a stone at the intersection of centerlines of Villa Road (100 feet wide) and Middle Urban Road (100 feet wide);

Thence, with the centerline of Villa Road, N 85° 34’ 25” W. a distance of 319.73 feet to a railroad spike set;

Thence, N 4° 24’ 08” E. 50.00 feet to a 5/8” iron rod set at the true point of beginning;

Thence, with the lines of the Eaglewood Villa, Ltd. 4.522 acre tract (Vol. 803, Page 795) the following thirteen courses:

N. 4° 24’ 08” E. a distance of 130.99 feet to a railroad spike set;

N. 31° 04’ 08” E. a distance of 47.50 feet to a PK nail set in a drill hole in concrete;

N. 58° 51’ 45” W. a distance of 82.58 feet to a point against the East wall of the Eaglewood Villa, Ltd. building, passing a 5/8” iron rod set at 80.58 feet;

N. 30° 58’ 34” E. with the East face of said wall, a distance of 47.00 feet to a point at an angle in the wall;

S. 59° 00’ 13” E. with a South face of the Eaglewood Villa, Ltd. wall, a distance of 43.89 feet to a point at an angle in the said wall;

N. 30° 59’ 47” E. a distance of 15.00 feet to a PK nail set in a drill hole in concrete passing the North wall of the Woodland Manor Limited Partnership building at 13.70 feet;

S. 59° 00’ 13” E. parallel and 1.30 feet North from a North wall of the Woodland Manor Limited Partnership building, a distance of 23.00 feet to a PK nail set in a drill hole in concrete;


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N. 30° 59’ 47” E. parallel and 0.67 feet West from a West wall of the Woodland manor Limited Partnership building, a distance of 56.32 feet to a 5/8” iron rod set;

N. 21° 37’ 11” W. a distance of 49.06 feet to a PK nail set in a concrete sidewalk;

With a curve to the right having a radius of 134.42 feet, a central angle of 43° 08’ 34” and a chord distance of 98.84 feet bearing N. 80° 38’ 28” E. an arc distance of 101.22 feet to a 5/8” iron rod set;

With a curve to the right having a radius of 234.00 feet, a central angle of 16° 37’ 25” and a chord distance of 67.65 feet bearing S. 69° 28’ 47” E. an arc distance of 67.89 feet to a 5/8” iron rod set;

With a curve to the right having a radius of 175.00 feet, a central angle of 23° 44’ 33” and a chord distance of 72.00 feet bearing S. 73° 02’ 10” E. an arc distance of 72.52 feet to a 5/8” iron rod set;

S. 84° 54’ 26” E. a distance of 13.81 feet to a 5/8” iron rod set, passing a 5/8” iron rod set at 3.81 feet;

Thence with the West line of the City of Springfield, Ohio’s 1.111 acres (Volume 305, Page 892), S. 5° 02’ 50” W. a distance of 319.58 feet to a 5/8” iron rod set;

Thence with the North lie of the City of Springfield, Ohio’s 1.111 acres N. 85° 34’ 25” W. a distance of 280.29 feet to the place of beginning;

Containing 2.128 acres o which 0.073 acre is within the street rights-of-way.

The basis for bearing is based upon the centerline of Middle Urban Road being S. 5° 02’ 50” W, and all other bearing are from angles and distances measured in a field survey by Lee Surveying and Mapping Company on June 22, 1993.

Description prepared by Jeffrey I. Lee, Professional Surveyor 6359, on June 21, 1993.

Parcel II:

Together with Easements as contained in Reciprocal Easement Agreement by and between Woodland Manor Property Holdings, LLC and Eaglewood Property Holdings, LLC, dated December 30, 2011 and recorded at Deed Book 1948, Page 2414, Clark County, Ohio, Records.


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Exhibit 10.26


Document prepared by:
Jeremy F. Segall, Esq.
GUTNICKI LLP
4711 Golf Rd., Ste. 200
Skokie, Illinois 60076

And after Recording Return to:
Darryl B. Austin
HUD Atlanta Regional Office
40 Marietta St.
Atlanta, GA 30303-2806

Healthcare Regulatory Agreement - Borrower
Section 232















U.S. Department of Housing
and Urban Development
Office of Residential
Care Facilities

















OMB Approval No. 2502-0605
(exp. 06/30/2017)
Public reporting burden for this collection of information is estimated to average 0.5 hours. This includes the time for collecting, reviewing, and reporting the data. The information is being collected to obtain the supportive documentation which must be submitted to HUD for approval, and is necessary to ensure that viable projects are developed and maintained. The Department will use this information to determine if properties meet HUD requirements with respect to development, operation and/or asset management, as well as ensuring the continued marketability of the properties. This agency may not collect this information, and you are not required to complete this form, unless it displays a currently valid OMB control number.

Warning: Any person who knowingly presents a false, fictitious, or fraudulent statement or claim in a matter within the jurisdiction of the U.S. Department of Housing and Urban Development is subject to criminal penalties, civil liability, and administrative sanctions.

Project Name :      Glenvue Health & Rehab Center

FHA Project No. :      061-22138

Project Location :      Glennville, Tattnall County, Georgia

Lender :          HOUSING & HEALTHCARE FINANCE, LLC,
a Delaware limited liability company

Original Principal Amount of Note :      $8,816,800.00

Date of Note :          as of September 24, 2014

Originally endorsed for insurance under Section 232, pursuant to Section 223(f)

Borrower :          GLENVUE H&R PROPERTY HOLDINGS, LLC,
a Georgia limited liability company
Profit-Motivated X Non-Profit ___
Is Non-Profit Borrower permitted to take Distributions? Yes N/A No N/A
(Failure to check the appropriate space(s) shall not affect the enforceability or application of this Agreement.)

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This Healthcare Regulatory Agreement - Borrower (this “ Agreement ”) is entered into this 24th day of September , 2014, between GLENVUE H&R PROPERTY HOLDINGS, LLC , a limited liability company organized and existing under the laws of Georgia , whose address is 1145 Hembree Rd., Roswell, Georgia 30076 , its successors, heirs, and assigns (jointly and severally) (“ Borrower ”) and the U.S. Department of Housing and Urban Development, acting by and through the Secretary, his or her successors, assigns or designates (“ HUD ”). Borrower is sometimes also referred to as “Owner” or “Mortgagor” in the Loan Documents and Program Obligations. If Borrower is also Operator, references in this Agreement to Operator refer to Borrower. To the extent that Borrower contracts with any other party to perform any functions included in this Agreement, Borrower shall maintain ultimate responsibility for performance of all required functions included herein.

In consideration of, and in exchange for an action by HUD, HUD and Borrower agree to the terms of this Agreement. The HUD action may be one of the following: HUD’s endorsement for insurance of the Note, HUD’s consent to the transfer of any of the Mortgaged Property, HUD’s sale and conveyance of any of the Mortgaged Property, or HUD’s consent to other actions related to Borrower, the Project, or to the Mortgaged Property.

Borrower and HUD execute this Agreement in order to comply with Program Obligations, with the requirements of the National Housing Act, as amended, and the regulations adopted by HUD pursuant thereto. This Agreement shall continue during such period of time as HUD shall be the owner, holder, or insurer of the Note. Upon satisfaction of the Note, as evidenced by the discharge or release of the Borrower’s Security Instrument, this Agreement shall automatically terminate. However, Borrower shall be responsible for any violations of this Agreement which occurred prior to termination.

Violation of this Agreement or Program Obligations may subject Borrower and other signatories hereto to adverse actions.

Borrower and HUD covenant and agree as follows:

I. DEFINITIONS.

1. DEFINITIONS. Any capitalized term or word used herein but not defined shall have the meaning given to such term in the Borrower’s Security Instrument. The following terms, when used in this Agreement (including when used in the above recitals), shall have the following meanings, whether capitalized or not and whether singular or plural, unless, in the context, an incongruity results:

“ Affiliate ” is defined in 24 C.F.R. 200.215, or any successor regulation.

“ Approved Use ” means the use of the Project for the operation of the Healthcare Facility as a nursing home facility with 160 beds, of which not less than 160 beds are to be in use and such

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other uses as may be approved in writing from time to time by HUD based upon a request made by Borrower, Master Tenant, or Operator, but excluding any uses that are discontinued with the written approval of HUD.

“ Borrower ” shall mean the entity identified as “Borrower” in the first paragraph of this Agreement, together with any successors, heirs, and assigns (jointly and severally). “Borrower” shall include any person or entity taking title to the Mortgaged Property whether or not such person or entity assumes the Note. “Borrower” is sometimes also referred to in the Loan Documents and Program Obligations as the “Obligor,” the “Owner,” and/or the “Mortgagor.”

“ Borrower-Operator Agreement ” means any agreement relating to the operation of the Healthcare Facility by and between Borrower Master Tenant and Operator, including any Operator Lease.

“ Borrower’s Security Instrument ” means the Healthcare Deed to Secure Debt, Assignment of Leases, Rents and Revenue and Security Agreement, and shall be deemed to be the mortgage as defined by Program Obligations.

“ Distribution ” means any disbursal, conveyance, loan or transfer of cash, any asset of Borrower, or any other portion of the Mortgaged Property, other than in payment of Reasonable Operating Expenses.

“ Firm Commitment ” means the commitment for insurance of advances or commitment for insurance upon completion, dated June 18, 2014, issued to Lender by HUD under which the debt evidenced by the Note is to be insured pursuant to a Section of the National Housing Act.

“ Fixtures ” has the meaning set forth in the Borrower’s Security Instrument.

“ Healthcare Facility ” means that portion of the Project operated on the Land as a Nursing Home, Intermediate Care Facility, Board and Care Home, Assisted Living Facility and/or any other healthcare facility authorized to receive insured mortgage financing pursuant to Section 232 of the National Housing Act, as amended, including any commercial space included in the facility.

“ HUD ” means the U.S. Department of Housing and Urban Development acting by and through the Secretary in the capacity as insurer or holder of the Loan under the authority of the National Housing Act, as amended, the Department of Housing and Urban Development Act, as amended, or any other federal law or regulation pertaining to the Loan or the Project.

“ Improvements ” has the meaning set forth in the Borrower’s Security Instrument.

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“ Indebtedness ” means the principal of, interest on, and all other amounts due at any time under the Note or the Loan Documents, including prepayment premiums, late charges, default interest, and advances to protect the security as provided in the Loan Documents.

“ Land ” has the meaning set forth in the Borrower’s Security Instrument and is also legally described on Exhibit A , attached hereto and incorporated herein.

“ Lender ” means the entity identified as “Lender” in the first paragraph of the Borrower’s Security Instrument, or any subsequent holder of the Note, and whenever the term “Lender” is used herein, the same shall be deemed to include the “Obligee”, or the “Trustee(s)” and the “Beneficiary” of the Borrower’s Security Instrument, and shall also be deemed to be the “Mortgagee” as defined by Program Obligations.

“ Loan Documents ” has the meaning set forth in the Borrower’s Security Instrument.

“ Master Lease ” means that certain Master Lease Agreement , in which the Healthcare Facility is aggregated with other HUD-insured healthcare facilities and leased to the Master Tenant.

“ Master Tenant ” means 2014 HUD MASTER TENANT, LLC , a limited liability company organized and existing under the laws of Georgia , the master tenant pursuant to the Master Lease.

“ Master Tenant’s Regulatory Agreement ” means that certain Healthcare Regulatory Agreement - Master Tenant, relating to the Project and entered into by Master Tenant for the benefit of HUD.

“ Mortgaged Property ” has the meaning set forth in the Borrower’s Security Instrument.

“ Non-Profit Borrower ” means a Borrower that is treated under the Firm Commitment as an entity organized for purposes other than profit or gain for itself or persons identified therewith, pursuant to Section 501(c)(3) or other applicable provisions of the Internal Revenue Code. For transactions entered into pursuant to Section 223(a)(7) of the National Housing Act, a Borrower who executed with HUD’s permission a “for-profit” regulatory agreement in connection with the original loan being refinanced through this transaction shall not be considered a “Non-Profit Borrower” for purposes of this Agreement and may designate itself as a “Profit-Motivated” entity on page 1, provided, however, that any conditions in the Firm Commitment conflicting with the above statement shall control.

“ Note ” means the Note executed by Borrower, described in the Borrower’s Security Instrument, including all schedules, riders, allonges and addenda, as such Note may be amended from time to time.

“ Notice ” is defined in Section 45.

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“ Operator ” means GLENVUE H&R NURSING, LLC , a limited liability company organized and existing under the laws of Georgia , or any subsequent operator approved by HUD.

“ Operator Lease ” means a lease by Borrower Master Tenant to Operator providing for the operation of the Healthcare Facility.

“ Operator’s Regulatory Agreement ” means that certain Healthcare Regulatory Agreement - Operator relating to the Project and entered into by Operator for the benefit of HUD.

“ Personalty ” has the meaning set forth in the Borrower’s Security Instrument.

“ Principal ” is defined in 24 C.F.R. 200.215, and any successor regulation, provided that for purposes of the Loan Documents, “Principal” shall also include the managing member and any other member that has a twenty-five percent (25%) or more interest in a limited liability company.

“ Program Obligations ” means (1) all applicable statutes and any regulations issued by HUD pursuant thereto that apply to the Project, including all amendments to such statutes and regulations, as they become effective, except that changes subject to notice and comment rulemaking shall become effective only upon completion of the rulemaking process, and (2) all current requirements in HUD handbooks and guides, notices, and mortgagee letters that apply to the Project, and all future updates, changes and amendments thereto, as they become effective, except that changes subject to notice and comment rulemaking shall become effective only upon completion of the rulemaking process, and provided that such future updates, changes and amendments shall be applicable to the Project only to the extent that they interpret, clarify and implement terms in this Agreement rather than add or delete provisions from such document. Handbooks, guides, notices, and mortgagee letters are available on HUD’s official website: http://www.hud.gov/offices/adm/hudclips/index.cfm or a successor location to that site.

“ Project ” has the meaning set forth in the Borrower’s Security Instrument.

“ Property Jurisdiction ” is any jurisdiction in which the Land is located.

“ Reasonable Operating Expenses ” means expenses that arise from the operation, maintenance and routine repair of the Project, including all payments and deposits required under this Agreement and any of the Loan Documents, and comply with the requirements of 24 C.F.R. 232.1007, or successor regulation.

“ Rent ,” “ Profits ” and “ Income ” shall include: all rent due pursuant to any Master Lease or Operator Lease; any payments due pursuant to any Residential Agreement; any other lease payments, revenues, charges, fees and assistance payments arising from the operation of the Project, including but not limited to, if and for so long as applicable, commercial leases,

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workers’ compensation, social security, Medicare, Medicaid, and other third-party reimbursement payments, Accounts Receivable (as defined in the Borrower’s Security Instrument) and all payments and income arising from the operation of the Healthcare Facility and/or the provision of services to residents thereof.

“ Reserve for Replacement ” is defined in Section 13.

“ Residential Agreement ” means a lease or other resident agreement between the operator of the Healthcare Facility and a resident setting forth the terms of the resident’s living arrangement and the provision of any related services.

“ Residual Receipts ” means certain funds held by a Non-Profit Borrower which are restricted in their use by this Agreement and Program Obligations, and otherwise described in Section 17.

“ Surplus Cash ” is defined in Section 15.

“ Taxes ” means all taxes, assessments, vault rentals and other charges, if any, general, special or otherwise, including all assessments for schools, public betterments and general or local improvements, that are levied, assessed or imposed by any public authority or quasi-public authority, and that, if not paid, could become a lien on the Land or the Improvements.

“ Waste ” means a failure to keep the Project in decent, safe and sanitary condition and in good repair. “Waste” also means the failure to meet certain financial obligations regarding the payment of Taxes and the relinquishment of the possession of Rents. During any period in which HUD insures the Loan or holds a security interest on the Mortgaged Property, Waste is committed when, without Lender’s and HUD’s express written consent, Borrower:

(1)
physically changes, or permits changes to, the Mortgaged Property, whether negligently or intentionally, in a manner that reduces its value;
(2)
fails to maintain the Mortgaged Property in decent, safe, and sanitary condition and in good repair;
(3)
fails to pay, or cause to be paid, before delinquency any Taxes that because of such failure, may subject the Project to a lien having priority over the Borrower’s Security Instrument;
(4)
materially fails to comply with covenants in the Note, the Borrower’s Security Instrument, this Agreement, or any of the Loan Documents respecting physical care, maintenance, construction, abandonment, demolition, or insurance against casualty of the Mortgaged Property; or
(5)
retains possession of Rents to which Lender or its assigns have the right of possession under the terms of the Loan Documents.

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II. CONSTRUCTION; REPAIRS.

2. CONSTRUCTION FUNDS. Borrower shall keep construction funds of the Project, if any, separate and apart from operating funds of the Project, including without limitation any funds necessary to operate the Healthcare Facility.

3. UNPAID OBLIGATIONS. Borrower certifies that upon final endorsement of the Note by HUD, Borrower shall have no unpaid obligations in connection with the purchase of the Mortgaged Property, the construction of the Mortgaged Property, or with respect to the Borrower’s Security Instrument except such unpaid obligations as have the written approval of HUD as to terms, form and amount.

4. LENDER’S CERTIFICATE. Borrower shall be bound by the terms of either the Lender’s Certificate, a copy of which has been provided to Borrower, and/or the Request for Endorsement of Credit Instrument & Certificate of Lender, Borrower & General Contractor, as applicable (a copy of which has been provided to Borrower), insofar as the applicable document establishes or reflects obligations of Borrower, and Borrower agrees that the fees and expenses enumerated in the applicable document have been fully paid or payment has been provided for as set forth in the applicable document and that all funds deposited with Lender shall be used for the purposes set forth in the applicable document insofar as Borrower has rights and obligations in respect thereto.

5. CONSTRUCTION COMMENCEMENT/REPAIRS. Borrower shall not commence, and has not commenced, construction or substantial rehabilitation of the Mortgaged Property prior to HUD endorsement of the Note except as permitted by Program Obligations or as otherwise permitted by HUD, and provided that this Section 5 is not applicable if HUD has given prior written approval to an early commencement or early start of construction, or if this Project is an Insurance Upon Completion loan or involves a loan refinancing.

6. DRAWINGS AND SPECIFICATIONS. The Project shall be constructed in accordance with the terms of the Construction Contract as approved by HUD, if any, and with the “Drawings and Specifications,” as such term is referred to in such Construction Contract.

7. REQUIRED CONSTRUCTION PERMITS. Unless otherwise required in the Construction Contract and Building Loan Agreement, Borrower has obtained all necessary certificates, permits, licenses, qualifications, authorizations, consents and approvals from all necessary Governmental Authorities to own, construct or substantially rehabilitate, to carry out all of the transactions required by the Loan Documents and to comply with all applicable federal statutes and regulations of HUD in effect on the date of the Firm Commitment, except for those, if any, which customarily would be obtained at a later date, at an appropriate stage of construction or completion thereof, and which the Borrower shall obtain in the future. The licenses and permits that are in effect as of the date hereof are sufficient to allow any

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construction (or substantial rehabilitation, as applicable) of the Improvements to proceed to completion in the ordinary course. As the construction (or substantial rehabilitation, as applicable) of the Project progresses, unless otherwise required by the Construction Contract, Borrower shall procure and submit all necessary building and other permits required by Governmental Authorities. The Project shall not be available for residency by any resident, nor shall the Healthcare Facility commence operations, except to the extent approved by prior written consent of HUD and of all other legal authorities having jurisdiction of the Project.

8. PRE-COMPLETION ACCOUNTING REQUIREMENTS. Borrower shall submit an accounting to HUD, as required by Program Obligations, for all receipts and disbursements during the period starting with the date of first occupancy of the Mortgaged Property after [initial] endorsement of the Note and ending, at the option of Borrower, any date after completion of the Project, as determined in accordance with Program Obligations. Any income of the Project in excess of disbursements for HUD-approved construction and development costs and Reasonable Operating Expenses, as such excess is determined by HUD, shall be treated as a recovery of construction cost, except as otherwise allowed in Program Obligations.

III. FINANCIAL MANAGEMENT.

9. OUTSTANDING OBLIGATIONS. Borrower shall have no obligations as of the date of this Agreement except those approved by HUD in writing and, except for those approved obligations, the Land has been paid for in full (or if the Land is subject to a leasehold interest, it must be subject to a HUD-approved lease), and is free from any liens or purchase money obligations, except as approved by HUD. As of the date hereof, all contractual obligations relating to the Project have been fully disclosed to HUD.

10. PAYMENTS. Borrower shall make promptly all payments, including any deposits to required reserves, due under the Loan Documents, including without limitation the Note and the Borrower’s Security Instrument.

11. PROPERTY AND OPERATION; ENCUMBRANCES.

(a) Borrower shall deposit all receipts of Borrower relating to the Project including all Rents, Advances, and equity or capital contributions required under the Firm Commitment or otherwise advanced for the purpose and as part of the Mortgaged Property, in the name of Borrower, for the benefit of the Project, in a federally insured depository or depositories and in accordance with Program Obligations, provided that, in accordance with Program Obligations, an account held in an institution approved by the Government National Mortgage Association may have a balance that exceeds the amount to which such deposit insurance is limited. Equity or capital contributions shall not include certain syndication proceeds, such as proceeds from Low Income Housing Tax Credit transactions used to repay bridge loans, all as more fully set forth in Program Obligations. Such funds shall be withdrawn only in accordance with the

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provisions of this Agreement and Program Obligations. Any person or entity receiving Mortgaged Property or any other proceeds of the Project other than for eligible purposes pursuant to this Agreement shall immediately deliver such Mortgaged Property or other proceeds to Borrower for the benefit of the Project and failing so to do shall hold and be deemed to hold such Mortgaged Property in trust for the benefit of the Project.

(b) Borrower shall not engage in any business or activity, including the operation of any other project or other healthcare facility, or other ancillary businesses, or incur any liability or obligation not in connection with the Project. Borrower shall not acquire an Affiliate or contract to enter into any affiliation with any party, except as approved by HUD.

(c) Borrower shall immediately satisfy or obtain a release of any mechanic’s lien, attachment, judgment lien, or any other lien that attaches to the Mortgaged Property, except to the extent permitted by HUD.

(d) Penalties, including but not limited to delinquent tax penalties, shall not be paid from the Mortgaged Property except to the extent such payments are considered Distributions and are allowed pursuant to this Agreement.

(e) Borrower shall promptly notify HUD of the appointment of any receiver for the Project, the filing of a petition in bankruptcy or insolvency or for reorganization, as well as the retention of any attorneys, consultants or other professionals in anticipation of such an appointment or filing.

(f) Borrower shall cause the Project to be insured at all times in accordance with the Borrower’s Security Instrument and Program Obligations, and Borrower shall notify HUD of all payments received, or claimed, from an insurer.

(g) Borrower shall notify HUD of any action or proceeding relating to any condemnation or other taking, or conveyance in lieu thereof, of all or any part of the Mortgaged Property, whether direct or indirect condemnation.

(h) Borrower shall notify HUD of any litigation proceeding filed against Borrower or Principals, Operator, the Healthcare Facility, or the Project, or any litigation proceeding filed by Borrower, pursuant to Program Obligations.

(i) If the Healthcare Facility is an Assisted Living Facility, Borrower shall require that no more than one person shall occupy any residential unit of the Healthcare Facility unless Operator receives prior written consent from all residents of such unit.

12. FINANCIAL ACCOUNTING. Borrower shall keep the books and accounts of the operation of the Mortgaged Property in accordance with Program Obligations. Financial records of Borrower and the Project shall be complete, accurate and current at all times. Posting

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must be made at least monthly to the ledger accounts, and year-end adjusting entries must be posted promptly in accordance with sound accounting principles. All expenditures in connection with the Project must be fully documented so as to provide reasonable assurance to all persons or entities that review such expenditures that such expenditures are permitted under Program Obligations. Undocumented expenses shall not be considered Reasonable Operating Expenses.

13. RESERVE FOR REPLACEMENT.

(a) Borrower shall establish and maintain a Reserve for Replacement account for defraying certain costs for replacing major structural elements and mechanical equipment of the Project or for any other purpose. The Reserve for Replacement shall be deposited with Lender or in a safe and responsible depository designated by Lender in accordance with Program Obligations. Such funds shall at all times remain under the control of Lender or Lender’s designee, whether in the form of a cash deposit or invested in obligations of, or fully guaranteed as to principal by, the United States of America or in such other investments as may be allowed by HUD and shall be held in accounts insured or guaranteed by a federal agency and in accordance with Program Obligations.

(b) Borrower shall deposit at endorsement of the Note an initial amount of $240,000.00, if applicable, and Borrower shall deposit a monthly amount of $5,333.00, concurrently with the beginning of payments towards amortization of the Note unless a different date or amount is established by HUD. At least every ten years, starting November 1, 2023 , and more frequently at HUD’s discretion, Borrower shall submit to HUD a written analysis of its use of the Reserve for Replacement during the prior ten years and the projected use of the Reserve for Replacement funds during the coming ten years in accordance with Program Obligations. The amount of the monthly deposit may be increased or decreased from time to time at the written direction of HUD without a recorded amendment to this Agreement. In connection therewith, every ten years starting November 1, 2023 , the Lender shall obtain a physical and capital needs assessment report for HUD to evaluate. The cost of such report may be paid from the Reserve for Replacements. HUD may, in its sole discretion, require Borrower to maintain a minimum balance in the account, in an amount to be set by HUD.

(c) Borrower shall carry the balance in this account on the financial records as a restricted asset. The Reserve for Replacement shall be invested in accordance with Program Obligations, and any interest earned on the investment shall be deposited in the Reserve for Replacement for use by the Project in accordance with this Section 13.

(d) Disbursements from such account shall only be made after consent, in writing, of HUD, which may be given or withheld in HUD’s sole discretion. In the event of a notification of default under the terms of the Borrower’s Security Instrument pursuant to which the Indebtedness has been accelerated, a written notification by HUD to Borrower of a violation of this Agreement, or at such other times as determined solely by HUD, HUD may direct the application of the balance in such account to the amount due on the Indebtedness as accelerated

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or for such other purposes as may be determined solely by HUD.

(e) Upon Borrower’s full satisfaction of all of its obligations under the Loan Documents, any monies remaining in the Reserve for Replacement account shall be released to Borrower or its designee.

(f) Borrower may, only with the advance written approval of HUD, borrow funds from the Reserve for Replacement for Reasonable Operating Expenses as provided in Program Obligations. Such funds shall be repaid to the Reserve for Replacement by Borrower pursuant to the terms approved by HUD prior to the making of such loan. To the extent HUD does not specify repayment requirements, Borrower shall repay the Reserve for Replacement in full within thirty (30) days of the approved withdrawal. If Borrower fails to timely make any repayment installment pursuant to the terms approved by HUD, upon notice from HUD, Borrower shall immediately repay the full amount of such loan from non-Project funds.

14. [RESERVED.]

15. SURPLUS CASH.

(a) Surplus Cash shall be calculated semi-annually, at the end of the first six months of the Borrower’s annual fiscal year, and at the end of the Borrower’s annual fiscal year. Each Surplus Cash calculation shall be submitted to Lender and HUD with the filing of Borrower’s Annual Financial Reports, unless otherwise required by HUD.

(b) “ Surplus Cash ” means any cash remaining after:

(i)
the payment of (1) all sums due or currently required to be paid by Borrower under the Loan Documents, including any required deposits into reserves; and (2) all of Borrower’s obligations relating to the Project other than those required to be paid under the Loan Documents, unless funds for such payments have been set aside or deferment of payment has been approved by HUD; and

(ii)
the segregation of all amounts required to be held in trust (e.g., tenant security deposits) and all amounts required to be held (segregated) in other restricted asset accounts of the Project (e.g., Reserve for Replacements) pursuant to this Agreement, the Loan Documents and Program Obligations.

16. DISTRIBUTIONS.

(a) Borrower may make and take Distributions of Mortgaged Property, to the extent and as permitted by the law of the applicable jurisdiction, pursuant to the restrictions below,

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including without limitation the reconciliation requirements set forth in Section 16(d); provided however that, except as may be approved by HUD or permitted under Program Obligations, or as otherwise provided in this Agreement, Distributions of Mortgaged Property are prohibited for Non-Profit Borrowers.

(b) Distributions shall not be made:

(i)
from borrowed funds (unless the Borrower is Operator and such Distribution is permitted under the Operator’s Regulatory Agreement and Program Obligations) or prior to the completion of the construction or rehabilitation of the Project;

(ii)
after HUD has given written notice to Borrower of a violation or default under this Agreement and/or after Lender has given written notice to Borrower of a violation or default under any of the Loan Documents, and until the terms of such notices of violation or default have been satisfied to the satisfaction of HUD and/or Lender, as applicable;

(iii)
when Borrower or the Project is under a forbearance agreement;

(iv)
If: (A) necessary services for the operation of the Healthcare Facility are not being provided on a regular basis, which failure Borrower knows or should have known about in the exercise of due care; (B) written notices of necessary physical repairs or deficiencies involving exigent or significant health or safety risks to residents in connection with the Project (including but not limited to building code violations) by other Governmental Authorities and/or by HUD have been issued and remain unresolved to the satisfaction of the issuing Governmental Authority, (C) Borrower has been notified in writing by HUD, Lender or other Governmental Authority that necessary physical repairs and/or deficiencies exist in connection with the Project and Borrower has not corrected or cured, or caused to be corrected or cured, the identified items to HUD’s satisfaction, (D) there remain any outstanding loans from the Reserve for Replacement or Residual Receipts account, or any required deposits to such accounts have not been made when due, or (E) the Reserve for Replacement account or any other required reserve does not have the minimum balance required by HUD; and/or

(v)
if the Borrower is also Operator, at any time that Operator is prohibited from distributing, advancing or otherwise using funds attributable to the Healthcare Facility (e.g., failure to timely file financial reports or when Healthcare Facility Working Capital is negative).

(c) Any Distribution of any funds, which the party receiving such funds is not entitled

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to retain hereunder, shall be returned to Borrower’s Project-related accounts immediately.

(d) Upon each required calculation of Surplus Cash, Borrower must demonstrate positive Surplus Cash, or to the extent Surplus Cash is negative, repay to Project-related accounts any Distributions taken during such calculation period. Such repayment must be made within thirty (30) days of the conclusion of the reporting period, or such longer period approved by HUD.

(e) If a Non-Profit Borrower has been permitted to take Distributions, as indicated on the first page of this Agreement, and to the extent the annual audited financial statement of such Non-Profit Borrower demonstrates Surplus Cash, such Non-Profit Borrower may make Distributions of such Surplus Cash, upon the following conditions:

(i)
Distributions may only be made after the end of any annual or semi-annual fiscal period, and when the Borrower can demonstrate positive Surplus Cash pursuant to Section 15, at the end of the immediately prior annual or semi-annual fiscal period;

(ii)
Operator is in good standing with the applicable licensing agency and has no open state compliance issues or special focus facility designation;

(iii)
No unresolved audit findings in the annual audited financial statements exist relating to the Project;

(iv)
Borrower and Operator are in compliance with the terms of this Agreement and the Operator’s Regulatory Agreement, respectively, with no notice of noncompliance or violation from HUD;

(v)
No defaults exist under any of the Loan Documents and all payments required by any of the Loan Documents are current, with no notice of noncompliance or violation from HUD; and

(vi)
The balance of the Residual Receipts account remains equal to no less than six months of the Borrower’s required debt service (including any mortgage insurance premium, escrow deposit, reserve deposits, or any other payments required by Borrower pursuant to the Loan Documents).
The Non-Profit Borrower making Distributions must evidence, with appropriate documentation sufficient for audit and HUD monitoring purposes, compliance with each condition listed above at the time such Distribution is made, and must retain such documentation in accordance with Program Obligations, for audit and HUD monitoring purposes.


17. RESIDUAL RECEIPTS.

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(a) Any Non-Profit Borrower shall establish and maintain a Residual Receipts account. Unless and until otherwise approved in writing by HUD, Residual Receipts and the Residual Receipts account shall be restricted as set forth in this Section 17. Within ninety (90) days after the end of the annual or semi-annual fiscal period for which Surplus Cash is calculated, Borrower shall deposit into the Residual Receipts account an amount equal to the excess, if any, of (i) Surplus Cash as of the end of such fiscal period over (ii) the amount of any permitted Distributions therefrom.

(b) Residual Receipts shall be deposited with Lender or in a safe and responsible depository designated by Lender in accordance with Program Obligations. Residual Receipts shall at all times remain under the control of Lender or Lender’s designee, whether in the form of a cash deposit or invested in obligations of, or fully guaranteed as to principal by, the United States of America or in such other investments as may be allowed by HUD and shall be held in accounts insured or guaranteed by a federal agency and in accordance with Program Obligations.

(c) Borrower shall carry the balance in such account on the financial records as a restricted asset. Residual Receipts shall be invested in accordance with Program Obligations, and any interest earned on the investment shall be deposited in the Residual Receipts account for use by the Project in accordance with this Section 17.

(d) Disbursements from such account shall only be made after consent, in writing, of HUD, which may be given or withheld in its sole discretion, provided that, if the Non-Profit Borrower has been permitted to take Distributions as indicated on the first page of this Agreement, then HUD shall apply the conditions enumerated in Section 16(e) in granting or withholding such consent. In the event of a notification of default under the terms of the Borrower’s Security Instrument, pursuant to which the Indebtedness has been accelerated, a written notification by HUD to Borrower of a violation of this Agreement or at such other times as determined solely by HUD, HUD may direct the application of the balance in such account to the amount due on the Indebtedness as accelerated or for such other purposes as may be determined solely by HUD.

(e) Upon Borrower’s full satisfaction of all its obligations under the Loan Documents, all funds remaining in the Residual Receipts account shall be released to the Borrower.

(f) Borrower may, only with the advance written approval of HUD, borrow funds from Residual Receipts for Reasonable Operating Expenses as provided in Program Obligations or for such other purposes as HUD may permit. Such funds shall be repaid to the Residual Receipts account pursuant to the terms approved by HUD prior to the making of such loan. To the extent HUD does not specify repayment requirements, Borrower shall repay the Residual Receipts account in full within thirty (30) days of the approved withdrawal. If Borrower fails to timely make any repayment installment pursuant to the terms approved by HUD, upon notice

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from HUD, Borrower shall immediately repay the full unrepaid amount of all such loan from non-Project funds.

18. ADVANCES.

(a) All advances made by Borrower (or by a member, partner, shareholder of Borrower, or other individual or entity acting on behalf of Borrower) for Reasonable Operating Expenses or otherwise for the benefit of the Project must be deposited into the Project’s operating account, or otherwise as directed by HUD, as required by Program Obligations.

(b) Interest may accrue, and be paid, on such advances pursuant to terms approved by HUD in advance in writing.

(c) Repayments of advances must be approved by HUD, or as otherwise provided in Program Obligations.

19. PROJECT RECORDS. Borrower shall:

(a) Make and keep books, records, and accounts, in such reasonable detail, so as to fully, accurately, and fairly reflect the activities of Borrower.

(b) Record the Project’s assets, liabilities, revenues, expenses, receipts and disbursements in separate accounts from any other assets, liabilities, revenues, expenses, receipts and disbursements of Borrower so as to permit the production of a Statement of Financial Position, a Statement of Profit and Loss (Statement of Activities), and a Statement of Cash Flows for Borrower in which the activities of Borrower are separately identifiable from the activities of the Operator, unless Borrower is also Operator.

(c) Devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that:

(i)
Transactions are executed, and access to assets is permitted, only in accordance with Borrower’s authorization;

(ii)
Transactions are accurately and timely recorded to permit the preparation of quarterly and annual financial reports in conformity with applicable Program Obligations;

(iii)
Transactions are timely recorded in sufficient detail so as to permit an efficient audit of the Borrower’s books and records in accordance with Generally Accepted Auditing Standards (GAAS), Generally Accepted Government Auditing Standards (GAGAS), and other applicable Program Obligations; and

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(iv)
Transactions are timely recorded in sufficient detail so as to maintain accountability of the Borrower’s assets. The recorded accountability for assets shall be compared with the existing assets at reasonable intervals, but not less than annually, and appropriate action shall be taken with respect to any differences.

(d) Make the books, records and accounts of Borrower available for inspection by HUD or its authorized representatives, after reasonable prior notice, during normal business hours, at the Project or other mutually agreeable location or, at HUD’s request, shall provide legible copies of such documents to HUD or its authorized representatives within a reasonable time after HUD or its authorized representative makes a request for such documents.
 
(e) Include as a requirement in any operating or management contract that the books, records, and accounts of any agent of Borrower, as they pertain to the operations of the Project, shall be kept in accordance with the requirements of this Section 19 and be available for examination by HUD or its authorized representatives after reasonable prior notice during customary business hours at the Project or other mutually agreeable location or, at HUD’s request, the Management Agent shall provide legible copies of such documents to HUD or its authorized representatives within a reasonable time after HUD or its authorized representative makes the request.

20. ANNUAL FINANCIAL REPORTS.

(a) For so long as any portion or portions of this Section 20 are not expressly waived or modified in writing by HUD, within ninety (90) days, or such longer period established in writing by HUD, following the end of each fiscal year, Borrower shall furnish HUD and Lender with a complete annual financial report of all of Borrower’s financial activities for the immediately preceding fiscal year, or for such other period as approved by HUD in writing, prepared in accordance with Generally Accepted Accounting Principles (GAAP). For purposes of this Section 20, where Borrower is also Operator, and without limiting the requirements for Operator’s submission of financial reports to HUD under the Operator’s Regulatory Agreement, financial activities of Borrower and the Project shall include all of the activities of both Borrower and Operator. To the extent any records or other information of the Project is held by Operator, or any management agent or Affiliate, Borrower shall cause such entity to provide such information to Borrower, Lender, and HUD, and every contract related to the Project with Operator, or any management agent or Affiliate, shall include the provision that such information shall be provided on demand. All annual financial reports furnished to HUD required herein shall be furnished in accordance with 24 C.F.R. 5.801 and other Program Obligations, and shall include a certification in content and form prescribed by HUD and certified by Borrower.

(b) In addition, except as otherwise provided in this Section 20, annual financial reports shall be audited in accordance with Generally Accepted Auditing Standards (GAAS) and Government Auditing Standards (GAS), and certified by a certified public accountant licensed or

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certified by a regulatory authority of a state or other political subdivision of the United States, which authority makes such certified public accountant subject to regulations, disciplinary measures, or codes of ethics prescribed by law. Such certified public accountant must have no business relationship with Borrower other than for the provision of tax consulting and return preparation and auditing services.

(c) Any Non-Profit Borrower shall submit audited annual financial reports, as applicable, pursuant to federal notice (e.g., Office of Management and Budget Circular A-133). However, notwithstanding any additional time provided for Non-Profit Borrowers to submit audited annual financial reports, such Borrowers shall still be required to submit unaudited annual financial reports pursuant to Section 20(a), except that, for Borrowers that elect to submit their required audited annual financial reports early (i.e. within the time specified in Section 20(a)), the requirement to submit unaudited annual financial reports shall be waived.

(d) If Borrower fails to submit any annual financial report required by this Section 20 within ninety (90) days of the required due date, HUD, at its sole election, and without relieving Borrower of its requirement to file such report, may thereafter examine, or cause to be examined at Borrower’s expense, the books and records of Borrower and the Project for purposes of preparing a report of the operations of the Project for HUD’s use.

(e) Auditing costs and tax return preparation costs may be charged as Reasonable Operating Expenses only to the extent they are required of Borrower itself by state law, the Internal Revenue Service (“ IRS ”), the Securities and Exchange Commission, or HUD. Neither IRS audit costs nor costs of tax return preparation for partners, members, shareholders, Principals or Affiliates of Borrower are considered Reasonable Operating Expenses.

IV. PROJECT MANAGEMENT.

21. PRESERVATION, MANAGEMENT AND MAINTENANCE OF THE MORTGAGED PROPERTY. Borrower (a) shall not commit or permit Waste, (b) shall not abandon the Mortgaged Property, (c) shall restore or repair promptly, or cause to be restored or repaired promptly, in a good and workmanlike manner, any damaged part of the Project to the equivalent of its original condition, or such other condition as HUD may approve in writing, whether or not litigation or insurance proceeds or condemnation awards are available to cover any costs of such restoration or repair, and (d) shall keep, or cause to be kept, the Project in decent, safe, sanitary condition and good repair, including the replacement of Personalty and Fixtures with items of equal or better function and quality. Obligations (a) through (d) of this Section 21 are absolute and unconditional and are not limited by any conditions precedent and are not contingent on the availability of financial assistance from HUD or on HUD’s performance of any administrative or contractual obligations. In the event all or any of the Improvements shall be destroyed or damaged by fire, by an exercise of the power of eminent domain, by failure of warranty, or other casualty, the money derived from any settlement, judgment, or insurance on any portion of the Project shall be applied in accordance with the

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terms of Program Obligations and the Borrower’s Security Instrument or as otherwise may be directed in writing by HUD.

22. FLOOD HAZARDS. Borrower shall maintain, or cause to be maintained, flood insurance as required by Program Obligations.

23. CONTRACTS FOR GOODS AND SERVICES. Consistent with Program Obligations, to the extent that Borrower obtains, or causes to be obtained, contracts for goods, materials, supplies, and services (“ Goods and Services ”) at costs, amounts, and terms that do not exceed reasonable and necessary levels and those customarily paid in the vicinity of the Land for Goods and Services received, the purchase price of Goods and Services shall be based on quality, durability and scope of work. Reasonable Operating Expenses do not include amounts paid for betterments as defined in the Property Jurisdiction or the Improvements unless determined by HUD to be prudent and appropriate. If the Borrower is acquiring goods and services whose costs exceed five percent (5.00%) of the Healthcare Facility’s gross annual revenue, Borrower shall solicit written cost estimates. Borrower shall keep copies of all written cost estimates and contracts or other instruments relating to the Project, all or any of which may be subject to inspection and examination by HUD at the Project or other mutually agreeable location.

24. RESPONSIVENESS TO INQUIRIES. At the request of HUD, Borrower shall promptly furnish or cause to be furnished operating budgets and occupancy, accounting and other reports (including credit reports) and give or cause to be given specific answers to questions relative to income, assets, liabilities, contracts, operation, and conditions of the Project and the status of the Borrower’s Security Instrument.

25. PERMITS AND APPROVALS.

(a) Borrower shall at all times cause Operator, or any lessee or management agent, as applicable, to maintain in full force and effect, all appropriate certificates of need, bed authority, provider agreements, licenses, permits and approvals reasonably necessary to operate the Healthcare Facility or to fund the operation of the Project for the Approved Use (collectively, the “ Permits and Approvals ”). Without the prior written consent of HUD, none of the Permits and Approvals shall be conveyed, assigned, encumbered, transferred or alienated from the Healthcare Facility or the Project (nor shall they be relinquished to any licensing or certification authority). Borrower shall ensure that the Healthcare Facility and the Project are at all times operated in accordance with the requirements of the Permits and Approvals.

(b) The security interest referred to in Section 27 below shall constitute, to the extent permitted by law, a first lien upon all of the rights, titles and interests of Borrower, if any, in the Permits and Approvals. However, in the event of either a monetary or other default under this Agreement, the Note, the Borrower’s Security Instrument, or any of the other Loan Documents, the Borrower shall cooperate in any legal and lawful manner necessary or required to permit the

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continued operation of the Healthcare Facility for the Approved Use. For the intents and purposes herein, Borrower hereby irrevocably nominates and appoints Lender and HUD, their respective successors and assigns, each in its own capacity, as Borrower’s attorney-in-fact coupled with an interest to do all things that any such attorney-in-fact deems to be necessary or appropriate in order to facilitate the continued operation of the Healthcare Facility and the Project for the Approved Use, including but not limited to, the power and authority to provide any and all information and data, pay such fees as may be required, and execute and sign in the name of Borrower, its successors or assigns, any and all documents, as may be required by any Governmental Authority exercising jurisdiction over the Project.

(c) Borrower shall not alter, terminate or relinquish or suffer or permit the alteration, termination or relinquishment of any Permits and Approvals without the prior written approval of HUD. In the event that any such alteration, termination or relinquishment is proposed, upon learning of such proposed alteration, termination or relinquishment, Borrower shall advise HUD and Lender promptly. Borrower shall insert the foregoing requirements into any Borrower-Operator Agreement for the Project.

(d) Except as otherwise provided below or in Program Obligations, Borrower shall electronically deliver within two (2) Business Days after Borrower’s receipt thereof, to the assigned HUD personnel and Lender copies of any and all notices, reports, surveys and other correspondence (regardless of form) received by Borrower from any Governmental Authority that includes any statement, finding or assertion that (i) Borrower, Operator, the Project or any lessee or management agent of the Project is or may be in violation of (or default under) any of the Permits and Approvals or any governmental requirements applicable thereto, (ii) any of the Permits and Approvals are to be terminated, limited in any way, or not renewed, (iii) any civil money penalty relating to the Project is being imposed with respect to the Healthcare Facility, or (iv) Borrower, Operator, the Project or any lessee or management agent of the Project is subject to any governmental investigation or inquiry involving fraud. Borrower shall deliver to the assigned HUD personnel and Lender, simultaneously with delivery thereof to any Governmental Authority, any and all responses given by or on behalf of Borrower to any of the foregoing and shall provide to HUD and Lender, promptly upon request, such other information regarding any of the foregoing as HUD or Lender may request. Unless otherwise requested by HUD, the reporting requirement of this provision shall not encompass regulators’ communications relating solely to Licensed Nursing Facility surveys where the most severe citation level is at the “ G ” level or its equivalent (pursuant to CMS State Operations Manual, Chapter 7, as may hereafter be edited or updated, or any successor guidance) unless a citation at such level is either (i) unresolved from the two most recent consecutive prior surveys, or (ii) is a repeat violation having the same citation number. Moreover, unless otherwise requested by HUD or Lender, the initial communication from the Operator pursuant to this paragraph shall be a notice by email to the Lender describing the conduct cited, the scope and duration of remedy(ies) imposed, and the timelines for corrective actions. Then, unless otherwise requested by HUD or Lender, the next communication from the Operator shall be notification that the citations have been cleared by the issuing regulatory agency. The receipt by HUD and/or Lender of notices, reports, surveys,

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correspondence and other information shall not in any way impose any obligation or liability on HUD, the Lender or their respective agents, representatives or designees to take or refrain from taking any action, and HUD, Lender and their respective agents, representatives and designees shall have no liability for any failure to act thereon or as a result thereof.

26. OPERATOR; COOPERATION IN CHANGE OF OPERATOR

(a) Unless Borrower is itself the licensed operator of the Healthcare Facility, Borrower has or shall enter into and maintain [the Borrower-Operator Agreement] the Master Lease, and shall cause Master Tenant to enter into and maintain the Borrower-Operator Agreement, in such form as approved by HUD. Any Operator (including Borrower) must be approved by HUD and shall execute a Healthcare Regulatory Agreement - Operator (Form HUD-92466A-ORCF) upon such terms as are acceptable to HUD and an Operator Security Agreement (Form HUD-92323-ORCF) and deposit account control agreements in form and substance satisfactory to HUD and Lender. If Borrower is or becomes Operator, Borrower shall execute a Healthcare Regulatory Agreement - Operator (Form HUD-92466A-ORCF) upon terms acceptable to HUD and an Operator Security Agreement (Form HUD-92323-ORCF) and deposit account control agreements in form and substance satisfactory to HUD and Lender.

(b) Borrower shall require Operator to comply with the terms of the Operator’s Regulatory Agreement and shall set forth such requirements, or cause such requirements to be set forth, in any Borrower-Operator Agreement. Borrower shall require Master Tenant to comply with the terms of the Master Tenant’s Regulatory Agreement and shall set forth such requirements in any Master Lease.

(c) In the event that, consistent with the Operator’s Regulatory Agreement and/or Master Tenant’s Regulatory Agreement, HUD directs Borrower and/or Master Tenant to terminate any Borrower-Operator Agreement and/or Master Lease and procure a new Operator acceptable to HUD, Borrower shall expeditiously do so consistent with the continued operation of the Healthcare Facility for the Approved Use, and in cooperation with and subject to the requirements of the necessary regulatory and/or funding entities. Doing so shall in no way obviate the Borrower’s obligation to comply with all other terms of this Agreement or affect any enforcement action by HUD.

(d) In the event that Borrower is itself the licensed operator of the Healthcare Facility and HUD determines that (i) any of the Permits and Approvals have been or are at substantial and imminent risk of being terminated, suspended or otherwise restricted in such a way that the Project could not be operated for the Approved Use, as evidenced by, without limitation, letters of warning or imposition of penalties from applicable state and/or federal regulatory and/or funding agencies, or (ii) the financial viability of the Healthcare Facility is at substantial and imminent risk, then, pursuant to Program Obligations and without prejudice to any enforcement actions otherwise set forth in this Agreement, HUD may direct Borrower to retain the services of

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an operator acceptable to HUD. Upon such direction from HUD, Borrower shall expeditiously do so.

(e) Without prior approval of HUD, [the Operator Lease shall not, and may not be amended to] neither the Operator Lease nor the Master Lease shall or shall be amended to contain any provisions that cause such lease to be characterized as other than an “operating lease” pursuant to Generally Accepted Accounting Principles and FASB Standard 13 (or its successor), including without limitation provisions that convey an ownership interest in the Project to Operator or Master Tenant, as applicable, or grant Operator or Master Tenant, as applicable, a bargain purchase option during or after the lease term. Nothing herein shall be construed as prohibiting Borrower from granting an Operator or Master Tenant, as applicable, an option to purchase the Project on arms-length negotiated terms, provided that such terms do not cause the Operator Lease to be characterized as something other than an “operating lease” for accounting purposes and provided such option provides that the exercising of same is subject to the prior satisfaction of applicable Program Obligations, including those relating to the transfer of physical assets.

27. PERSONAL PROPERTY; SECURITY INTERESTS. Borrower shall suitably equip, or cause to be equipped, the Project for the Approved Use. Except as otherwise approved in writing by HUD, Borrower shall grant to Lender and HUD a first lien security interest in all personal property of Borrower related to the Project as additional security for the obligations of Borrower under the Note, the Borrower’s Security Instrument and this Agreement. Such security interest shall be evidenced by such security agreements as Lender and/or HUD may require and, in connection therewith, Borrower shall execute or cause to be executed and delivered such deposit account control agreements as may be required by Lender and/or HUD. Borrower hereby authorizes each of Lender and HUD to file such UCC financing statements, amendments, and continuation statements as either of them may deem to be necessary or appropriate in connection with the foregoing security interests. Borrower shall not be permitted to grant any other liens on any of the Mortgaged Property without the prior written approval of Lender and HUD.

28. PROFESSIONAL LIABILITY INSURANCE. Borrower shall maintain, or cause Operator or any lessee or management agent to maintain, professional liability insurance that complies with the applicable requirements of HUD. Annually, Borrower shall provide, or cause Operator or any lessee or management agent to provide, to HUD and Lender, a certification of compliance with such professional liability insurance requirements as evidenced by an Acord or certified copy of the insurance policy.

29. PROPERTY MANAGEMENT AGREEMENTS . If, in addition to or in lieu of any Borrower-Operator Agreement, Borrower enters into a property management agreement or other document outlining procedures for managing the Healthcare Facility (“Management Agreement”), such agreement or document must be approved by HUD and consistent with Program Obligations. Any management agent must be approved by HUD and must execute and

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deliver a Management Agent Certification - Residential Care Facilities (form HUD-9839-ORCF, or successor form) in such form as approved by HUD. Any Management Agreement shall contain the following provisions: (1) the Management Agreement shall terminate without penalty upon failure to comply with the provisions of Management Certification to HUD, or for other good cause, including without limitation for violations of the Borrower’s Regulatory Agreement, Operator’s Regulatory Agreement, and/or Master Tenant’s Regulatory Agreement, if any, thirty days after HUD has mailed to Borrower, or Operator, as applicable, a written notice of its desire to terminate the Management Agreement; (2) in the event that HUD determines that any of the Permits and Approvals reasonably necessary to operate the Healthcare Facility is at substantial and imminent risk of being terminated, suspended or otherwise restricted, if such termination, suspension or other restriction would have a materially adverse effect on the Project, the Management Agreement shall terminate immediately without penalty upon HUD’s issuance of a notice of termination to Borrower, or Operator, as applicable, and such management agent; and (3) the Management Agreement may not be assigned without the prior written approval of HUD. Upon HUD’s request for termination, Borrower, or Operator, as applicable, shall immediately arrange to terminate any such Management Agreement and shall make arrangements satisfactory to HUD for the continuing proper management of the Healthcare Facility and the Project. Any material amendment to the management agreement must be acceptable to HUD, in accordance with Program Obligations.

30. ACCEPTABILITY OF MANAGEMENT OF THE MORTGAGED PROPERTY . Borrower shall provide management of the Mortgaged Property in a manner consistent with Program Obligations and acceptable to HUD. Borrower shall take such actions as shall cause the Project to conform to Program Obligations.

31. TERMINATION OF CONTRACTS . Except as otherwise permitted by HUD, any contract pertaining to the Project with a vendor having an identity of interest with the Borrower and/or Operator, as determined by HUD pursuant to Program Obligations, shall provide: (1) in the event of a default under this Agreement, Master Tenant’s Regulatory Agreement, or the Operator’s Regulatory Agreement, the contract shall be subject to termination without penalty and without cause upon written request by HUD, within thirty (30) days notice of such termination; and (2) in the event that HUD determines that any of the Permits and Approvals are at substantial and imminent risk of being terminated, suspended or otherwise restricted so as to have a material adverse effect on the Project, the contract shall be subject to termination immediately without penalty and without cause upon written request by HUD. Upon such request by HUD, Borrower shall immediately arrange to terminate the contract, or cause Operator to terminate the contract, and Borrower shall also make arrangements, or cause Operator to make arrangements, satisfactory to HUD for continuing acceptable services to the Project effective as of the termination date of the contract.

32. MANAGEMENT AGENT. In the event that a management agent is or will be the holder of the Healthcare Facility license or is or will be the payee under one or more third-

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party payor agreements with respect to the Healthcare Facility, such management agent will be treated as an Operator in accordance with Program Obligations.

33. COMMERCIAL (NON-RESIDENTIAL) LEASES . No portion of the Project shall be leased for any commercial purpose or use without receiving HUD’s prior written approval as to terms, form and amount, except for commercial leases for support or ancillary services which are subordinate to the Borrower’s Security Instrument, have terms of not more than five (5) years and otherwise comply with Program Obligations. Borrower shall deliver, or cause to be delivered, an executed copy of any commercial lease to HUD and Lender within thirty (30) days after its effective date.

V. ACTIONS REQUIRING THE PRIOR WRITTEN APPROVAL OF HUD.

34. Borrower shall not without the prior written approval of HUD, including without limitation in accordance with Program Obligations:

(a) Convey, assign, transfer, pledge, hypothecate, encumber, or otherwise dispose of the Mortgaged Property or any interest therein, or permit the conveyance, assignment, or transfer of any interest or control in Borrower (if the effect of such conveyance, assignment or transfer is the creation or elimination of a Principal) unless permitted by Program Obligations. Borrower need not obtain the prior written approval of HUD for: (i) conveyance of the Mortgaged Property at a judicial or non-judicial foreclosure sale under the Borrower’s Security Instrument; (ii) inclusion of the Mortgaged Property in a bankruptcy estate by operation of law under the United States Bankruptcy Code; (iii) acquisition of an interest by inheritance or by court decree; or (iv) as otherwise allowed by Program Obligations.

(b) Enter into any contract, agreement or arrangement to borrow funds or finance any purchase or incur any liability, direct or contingent, other than in accordance with the Loan Documents and Program Obligations.

(c) Pay out any funds in violation of this Agreement, the Loan Documents, or Program Obligations.

(d) In accordance with 24 C.F.R. 232.1007 or any successor regulation, except for Distributions allowed pursuant to this Agreement, pay any compensation, including wages or salaries, in excess of fair and reasonable compensation or incur any obligation to do so, to any officer, director, stockholder, trustee, beneficiary, partner, member, or Principal of Borrower, or to any nominee thereof, except that, at any time at which Borrower is the operator of the Healthcare Facility, Borrower may pay fair and reasonable compensation to employees who are officers, directors, stockholders, trustees, beneficiaries, partners, members or Principals of Borrower.

(e) Enter into or change any contract, agreement or arrangement for supervisory or

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managerial services or leases for the operation of the Healthcare Facility or any portion of the Project, except as permitted under Program Obligations.

(f) Convey, assign or transfer any right to receive Rents of the Mortgaged Property.

(g) Remodel, add to, subtract from, construct, reconstruct or demolish any part of the Project, except as required by HUD under Section 21(c) and except that Borrower may, without approval of HUD, (i) dispose of or cause to be disposed of obsolete or deteriorated Fixtures or Personalty if the same are replaced with like items of the same or greater quality or value (provided, that Borrower shall have no obligation to replace any such Fixtures or Personalty that are not needed for operation of the Project) and (ii) make minor alterations that do not adversely affect the Mortgaged Property.

(h) Permit the use of the Project, including any portion of the Healthcare Facility, for any other purpose except the Approved Use, or permit commercial use greater than that originally approved by HUD.

(i) Amend the organizational documents of Borrower in such a way that modifies the terms of the organizational documents required by HUD, Lender, and/or Program Obligations, including, but not limited to: (i) any amendment that results in the creation or elimination of a Principal or modifies the requirements regarding the filing of a HUD previous participation certification when required by Program Obligations; (ii) any amendment that in any way affects the Loan Documents; (iii) any amendment that would change the identity of the persons and/or entities authorized to bind Borrower previously approved by HUD or pre-approve a successor general partner, manager or member to bind the partnership or company for any matters concerning the Project which require HUD’s consent or approval; (iv) a change in any general partner, manager or managing member or pre-approved successor general partner, manager or managing member of the partnership or company or any change in a guarantor of any obligation to HUD; and (v) any proposed changes to the mandatory HUD language included in the organizational documents. Copies of all fully executed amendments to the organizational documents must be provided to HUD within ten (10) days of the effective date of the amendment. If the amendments to the organizational documents are recorded, copies of the recorded documents must be provided to HUD within ten (10) days of receipt by Borrower.

(j) Except in cases funded by proceeds from professional liability insurance, institute litigation seeking the recovery of a sum in excess of $100,000, nor settle or compromise any action for specific performance, damages, or other equitable relief, in excess of $100,000; and in all cases dispose of or distribute the proceeds thereof.

(k) Reimburse any party from the Mortgaged Property for payment of expenses or costs of the Project except for Reasonable Operating Expenses and except for payments by means of Distributions.

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(l) Receive any fee or payment of any kind from Operator or any management agent or employee of the Project, or other provider of Goods or Services of the Project in exchange for the right to provide such Goods or Services.

(m) Except as provided in Section 33, enter into, or agree to the assignment of, any commercial lease for all or part of the Mortgaged Property.

(n) Enter into any amendment of any contract or lease relating to the Project, except to the extent such contract or lease does not require HUD’s approval, including without limitation any amendment that (i) reduces the rent or other payments due to Borrower, (ii) materially increases the obligations of Borrower or the rights of the other parties to such contract or lease, (iii) materially decreases the rights of Borrower or the obligations of the other parties to such contract or lease, or (iv) alters any provision of such contract or lease required by HUD to be included therein.

VI. ENFORCEMENT.

35. VIOLATION OF AGREEMENT. The occurrence of any one or more of the following shall constitute a “ Violation ” under this Agreement:

(a) Any failure by Borrower to comply with any of the provisions of this Agreement;

(b) Any failure by Borrower to comply with any of the provisions of any other of the Loan Documents;

(c) Any fraud or material misrepresentation or material omission by Borrower, any of its officers, directors, trustees, general partners, members, managers, employees, representatives or managing agent in connection with (1) any financial statement, rent roll or other report or information provided to HUD during the term of this Agreement or (2) any request for HUD’s consent to any proposed action, including a request for disbursement of funds from any restricted account for which HUD’s prior written approval is required; or

(d) The commencement of a forfeiture action or proceeding, whether civil or criminal, which, in HUD’s reasonable judgment, could result in a forfeiture of the Mortgaged Property or otherwise materially impair Lender’s and/or HUD’s interest in the Mortgaged Property.


36. NOTICE OF VIOLATION AND EVENT OF DEFAULT.

(a) At any time during the existence of a Violation, HUD may give written notice of such Violation to Borrower (the “ Violation Notice ”), addressed to the addresses stated in this Agreement, or such other addresses as may subsequently, upon appropriate written Notice to

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HUD and Lender, be designated by Borrower as its legal business address. Borrower shall have thirty (30) days to cure, or cause to be cured, any Violation described in the Violation Notice, provided that HUD shall extend such thirty (30) day period by such time as HUD may reasonably determine is necessary to correct the Violation for so long as, HUD determines, in its discretion, that: (i) Borrower is timely satisfying all payment obligations in the Loan Documents; (ii) none of the Permits and Approvals is at substantial and imminent risk of being terminated; (iii) such violation cannot reasonably be corrected during such thirty (30) day period, but can reasonably be corrected in a timely manner, and (iv) Borrower, Master Tenant, or Operator commences to correct such Violation, or cause such correction to be commenced, during such thirty (30) day period and thereafter diligently and continuously proceeds to correct, or cause correction of, such Violation. If, after delivery of such Violation Notice and applicable cure period, the Violation is not corrected to the satisfaction of HUD, HUD may declare an Event of Default under this Agreement without further Notice. Alternatively, if necessary in HUD’s determination to protect the health and safety of the tenants or the financial or operational viability of the Healthcare Facility, HUD may declare an Event of Default at any time during the existence of a Violation without providing prior written notice of the Violation.

(b) Notwithstanding any other provisions of this Agreement, if HUD determines at any time that any of the Permits and Approvals are at substantial and imminent risk of being terminated, suspended or otherwise restricted if such termination, suspension, or other restriction would have a materially adverse effect on the Project, including without limitation, HUD’s determination that there is a substantial risk that deficiencies identified by applicable state and/or federal regulatory and/or funding agencies cannot be cured in such manner and within such time periods as would avoid the loss, suspension, or diminution of any of the Permits and Approvals that would have a materially adverse effect on the Project, or if HUD determines at any time that, as a result of a Violation, the value of the Mortgaged Property is at substantial and imminent risk of material adverse diminution, then HUD may immediately (without thirty (30) days notice) declare an Event of Default of this Agreement and may immediately proceed to take actions to pursue its remedies.

(c) Upon any declaration of an Event of Default, HUD may:

(i)
If HUD holds the Note, declare the whole of the Indebtedness immediately due and payable and then proceed with the foreclosure of the Borrower’s Security Instrument or otherwise dispose of HUD’s interest in the Note and the Borrower’s Security Instrument pursuant to Program Obligations;

(ii)
If the Note is not held by HUD, notify the holder of the Note of such default and require the holder to declare a default under the Note and the Borrower’s Security Instrument, and the holder after receiving such Notice and demand, shall declare the whole of the Indebtedness due and payable and thereupon proceed with foreclosure of the Borrower’s Security Instrument and/or the exercise of other remedies available to Lender under

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the Loan Documents or at law or equity, or assign the Note and the Borrower’s Security Instrument to HUD as provided in Program Obligations. Upon assignment of the Note and the Borrower’s Security Instrument to HUD, HUD may then proceed with the foreclosure of the Borrower’s Security Instrument or otherwise dispose of HUD’s interest in the Note and the Borrower’s Security Instrument pursuant to Program Obligations;

(iii)
Collect all Rents and charges in connection with the Project or the operation of the Healthcare Facility, to the extent permitted by applicable law, and use such collections to pay obligations of Borrower under this Agreement and under the Note and the Loan Documents and the necessary expenses of preserving and operating the Project;

(iv)
Take possession of the Mortgaged Property, bring any action necessary to enforce any rights of Borrower growing out of the Mortgaged Property’s operation, and maintain the Mortgaged Property in decent, safe, sanitary condition and good repair;

(v)
Apply to any court, state or federal, for specific performance of this Agreement, for an injunction against any Violations of this Agreement, for the appointment of a receiver to take over and operate the Project in accordance with the terms of this Agreement, or for such other relief as may be appropriate, as the injury to HUD arising from a default under any of the terms of this Agreement would be irreparable and the amount of damage would be difficult to ascertain; and,

(vi)
Collect reasonable attorney fees related to enforcing Borrower’s compliance with this Agreement.

(d) Any forbearance by HUD in exercising any right or remedy under this Agreement or otherwise afforded by applicable law shall not be a waiver of or preclude the exercise of any right or remedy.

(e) HUD agrees to honor the provisions of [Sections 4, 5, and 7 of that certain Master Lease Subordination, Non-Disturbance and Attornment Agreement] Section 5 of that certain Master Lease Subordination Agreement relating to the Project by and between Lender and Borrower, among others, insofar as such sections call for HUD’s consent for the release of the Project from the Master Lease and/or the Loan Documents, on the terms and subject to the limitations set forth in such sections.

37. MEASURE OF DAMAGES. The damage to HUD as a result of Borrower’s breach of duties and obligations under this Agreement shall be, in the case of failure to maintain, or cause to be maintained, the Project as required by this Agreement, the cost of the repairs

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required to return the Project to decent, safe and sanitary condition and good repair. This contractual provision shall not abrogate or limit any other remedy or measure of damages available to HUD under any civil, criminal or common law.



[ REMAINDER OF PAGE INTENTIONALLY LEFT BLANK. AGREEMENT CONTINUES ]

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38. NONRECOURSE DEBT. The following individuals or entities identified in the Firm Commitment: ADCARE HEALTH SYSTEMS, INC., a Georgia corporation , as identified in the Firm Commitment does not assume personal liability for payments due under the Note and the Borrower’s Security Instrument, or for the payments to the Reserve for Replacement, or for matters not under its control, provided that each said individual or entity shall remain personally liable under this Agreement only with respect to the matters hereinafter stated; namely: (a) for funds or property of the Project coming into its hands which, by the provisions of this Agreement, it is not entitled to retain; (b) for authorizing the conveyance, assignment, transfer, pledge, encumbrance, or other disposition of the Mortgaged Property or any interest therein in violation of this Agreement without the prior written approval of HUD; and (c) for its own acts and deeds, or acts and deeds of others, which it has authorized in violation of the provisions of this Section. The obligations of the individuals or entities listed in this Section shall survive any foreclosure proceeding, any foreclosure sale, any delivery of any deed in lieu of foreclosure, any termination of this Agreement, and any release of record of the Borrower’s Security Instrument.


                            
 
 
 
 
BORROWER:
Signed, sealed and delivered in the presence of:

 
 
ADCARE HEALTH SYSTEMS, INC.,
 
 
 
 
a Georgia corporation
  /s/ Rachel S. Zinkand
 
 
 
 
 
Witness
 
 
 
 
 
 
 
 
By
/s/ Ronald W. Fleming
  /s/ Ellen W. Smith
 
 
 
Ronald W. Fleming, Manager
Notary Public
 
 
 
 
 
 
 
My Commission Expires:
 
 
 
 
 
[NOTARIAL SEAL]
 










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VII. MISCELLANEOUS.

39. COMPLIANCE WITH LAWS.

(a) Borrower shall comply with all applicable: laws; ordinances; regulations; requirements of any Governmental Authority; lawful covenants and agreements (including the Borrower’s Security Instrument) recorded against the Mortgaged Property; and Program Obligations; including but not limited to those of the foregoing pertaining to: health and safety; construction of improvements on the Mortgaged Property; fair housing; civil rights; zoning and land use; Leases; lead-based paint maintenance requirements of 24 C.F.R. Part 35 and maintenance and disposition of resident security deposits; and, with respect to all of the foregoing, all subsequent amendments, revisions, promulgations or enactments. Borrower shall at all times maintain records sufficient to demonstrate compliance with the provisions of this Section 39. Borrower shall take appropriate measures to prevent, and shall not engage in or knowingly permit, any illegal activities at the Mortgaged Property including those that could endanger residents or visitors, result in damage to the Mortgaged Property, result in forfeiture of the Mortgaged Property, or otherwise impair the lien created by the Borrower’s Security Instrument or Lender’s interest in the Mortgaged Property. To the best of Borrower’s knowledge, Borrower represents and warrants to HUD that no portion of the Mortgaged Property has been or shall be purchased with the proceeds of any illegal activity.

(b) There shall be full compliance with the provisions of (1) any State or local laws prohibiting discrimination in housing on the basis of race, color, creed, or national origin; and (2) the regulations of HUD providing for non-discrimination and equal opportunity in housing. It is understood and agreed that failure or refusal to comply with any such provisions shall be a proper basis for HUD to take any corrective action it may deem necessary including, but not limited to, the rejection of applications for FHA mortgage insurance and the refusal to enter into future contracts of any kind with which Borrower is identified; and further, if Borrower is a corporation or any other type of business association or organization which may fail or refuse to comply with the aforementioned provisions, HUD shall have a similar right of corrective action (1) with respect to any individuals who are officers, directors, trustees, managers, partners, associates or principal stockholders of Borrower; and (2) with respect to any other type of business association, or organization with which the officers, directors, trustee, managers, partners, associates or principal stockholders of Borrower may be identified.

(c) HUD and Lender shall be entitled to invoke any remedies available by law or equity to redress any breach or to compel compliance by Borrower with these requirements, including any remedies available hereunder.

40. BINDING EFFECT. This Agreement shall bind, and the benefits shall inure to, Borrower, its heirs, legal representative, executors, administrators, successors in office or interest, and assigns, and to HUD and HUD’s successors, so long as the Contract of Insurance continues in effect, and during such further time as HUD shall be Lender, holder, coinsurer, or

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reinsurer of the Borrower’s Security Instrument, or obligated to reinsure the Note or the Borrower’s Security Instrument.

41. PARAMOUNT RIGHTS AND OBLIGATIONS. Borrower warrants that it has not, and shall not, execute any other agreement with provisions contradictory of, or in opposition to, the provisions hereof, and that, in any event, the requirements of this Agreement are paramount and controlling as to the rights and obligations set forth and supersede any other requirements in conflict therewith.

42. SEVERABILITY. The invalidity of any clause, part, or provision of this Agreement shall not affect the validity of the remaining portions hereof.

43. RULES OF CONSTRUCTION. The captions and headings of the sections of this Agreement are for convenience only and shall be disregarded in construing this Agreement. Any reference in this Agreement to an “ Exhibit ” or a “ Section ” shall, unless otherwise explicitly provided, be construed as referring, respectively, to an Exhibit attached to this Agreement or to a Section of this Agreement. All Exhibits attached to or referred to in this Agreement are incorporated by reference into this Agreement. Use of the singular in this Agreement includes the plural and use of the plural includes the singular. As used in this Agreement, the term, “including” means “including, but not limited to.”

44. PRESENT ASSIGNMENT. To the extent permitted by applicable law, Borrower irrevocably and unconditionally assigns, pledges, mortgages and transfers to HUD its rights to Rents, charges, fees, carrying charges, Project accounts, security deposits, and other revenues and receipts of whatsoever sort that it may receive or be entitled to receive from the operation of the Mortgaged Property, subject to the assignment of Rents and other provisions in the Borrower’s Security Instrument and, if Borrower is also Operator, subject to the rights of any accounts receivable lender under accounts receivable financing that has been approved by HUD. Until a default is declared under this Agreement, a revocable license is granted to Borrower to collect and retain such Rents, charges, fees, carrying charges, Project accounts, security deposits, and other revenues and receipts, but upon an Event of Default under this Agreement or under the Borrower’s Security Instrument, such revocable license is automatically terminated.

45. NOTICE.

(a) All notices, demands and other communications (“ Notice ”) under or concerning this Agreement shall be in writing. A courtesy copy of any Notice given by Borrower or HUD shall be sent simultaneously to Lender. Each Notice shall be addressed to the intended recipients at their respective addresses set forth below, and shall be deemed given on the earliest to occur of (i) the date when the Notice is received by the addressee; (ii) the first or second Business Day after the Notice is delivered to a recognized overnight courier service, with arrangements made for payment of charges for next or second Business Day delivery, respectively, or (iii) the third Business Day after the Notice is deposited in the United States mail with postage prepaid,

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certified mail, return receipt requested. As used in this Section 45, the term “ Business Day ” means any day other than a Saturday or a Sunday, a federal holiday or holiday in the state where the Project is located or other day on which the federal government or the government of the state where the Project is located is not open for business. When not specifically designated as a Business Day, the term “ day ” shall refer to a calendar day.

(b) Any party to this Agreement and Lender may change the address to which Notices intended for it are to be directed by means of Notice given to the other party in accordance with this Section 45. Each party agrees that it shall not refuse or reject delivery of any Notice given in accordance with this Section 45, that it shall acknowledge, in writing, the receipt of any Notice upon request by the other party and that any Notice rejected or refused by it shall be deemed for purposes of this Section 45 to have been received by the rejecting party on the date so refused or rejected, as conclusively established by the records of the U.S. Postal Service or the courier service.


BORROWER:
GLENVUE H&R PROPERTY HOLDINGS, LLC
 
1145 Hembree Rd.
 
Roswell, GA 30076
 
Attention: Manager
 
 
HUD:
FEDERAL HOUSING COMMISSIONER
 
U.S. Department of Housing and Urban Development
 
Office of Residential Care Facilities
 
451 Seventh St. SW
 
Washington, DC 20410
 
 
LENDER:
HOUSING & HEALTHCARE FINANCE, LLC
 
2 Wisconsin Circle, Ste. 540
 
Chevy Chase, Maryland 20815
 
Attention: Erik Lindenauer, Director

    

[ SIGNATURE PAGES FOLLOW ]


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IN WITNESS WHEREOF , the parties hereto have set their hands and seals on the date first herein above written.

Borrower hereby certifies that the statements and representations contained in this instrument and all supporting documentation thereto are true, accurate, and complete and that each signatory has read and understands the terms of this instrument. This instrument has been made, presented, and delivered for the purpose of influencing an official action of HUD in insuring the Loan, and may be relied upon by HUD as a true statement of the facts contained therein.





                            
 
 
 
 
BORROWER:
Signed, sealed and delivered in the presence of:

 
 
GLENVUE H&R PROPERTY HOLDINGS, LLC
 
 
 
 
 
 
  /s/ Rachel S. Zinkand
 
 
 
 
 
Witness
 
 
 
 
 
 
 
 
By
/s/ Ronald W. Fleming
  /s/ Ellen W. Smith
 
 
 
Ronald W. Fleming, Manager
Notary Public
 
 
 
 
 
 
 
My Commission Expires:
 
 
 
 
 
[NOTARIAL SEAL]
 















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ACKNOWLEDGEMENT


STATE OF MINNESOTA
)
 
 
 
 
) ss:
 
 
 
COUNTY OF HENNEPIN
)
 
 
 


The foregoing instrument was acknowledged before me on       18th                  day of SEPTEMBER, 2014 by Timothy P. Gruenes as duly authorized agent for the Secretary of the U.S. Department of Housing and Urban Development, acting by and through the Federal Housing Commissioner, and a Supervisory Account Executive in the Office of Residential Care Facilities, U.S. Department of Housing and Urban Development, and that he, being authorized to do so by virtue of such office, executed the foregoing instrument on behalf of the Federal Housing Commissioner, acting for the Secretary of the U.S. Department of Housing and Urban Development.                         
                                    

                        
[SEAL]
 
 
/s/ Miranda J. Schoenecker
 
 
 
 
Notary Public
 
 
 
 
(Print Name)
Miranda J. Schoenecker
 
 
 
 
 
 
 
HUD/OHP
 
Title (and rank)
 
 
 
 
 
My commission expires:
31 Jan 2016
 
 


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EXHIBIT A


ALL THAT TRACT OR PARCEL OF LAND LYING IN AND BEING IN GEORGIA MILITIA DISTRICT 1432, CITY OF GLENNVILLE, TATTNALL COUNTY, AND BEING MORE PARTICULARLY DESCRIBED AS FOLLOWS:

BEGINNING AT A POINT AT THE NORTH RIGHT OF WAY OF HENCART ROAD (60 FOOT RIGHT OF WAY) AND THE EAST RIGHT OF WAY OF NORTH VETERANS BOULEVARD (80 FOOT RIGHT OF WAY), THENCE NORTH ALONG THE SAID RIGHT OF WAY OF NORTH VETERANS BOULEVARD A DISTANCE OF 377.81 FEET TO AN IRON PIN FOUND, WHICH IS THE POINT OF BEGINNING;

THENCE ALONG THE SAID RIGHT OF WAY N 16 DEGREES 30 MINUTES 33 SECONDS E A DISTANCE OF 614.83 FEET TO AN IRON PIN SET; THENCE LEAVING THE SAID RIGHT OF WAY AND CONTINUING S 69 DEGREES 19 MINUTES 04 SECONDS E A DISTANCE OF 300.24 FEET TO AN IRON PIN SET AT THE RIGHT OF WAY OF CASWELL STREET (60 FOOT RIGHT OF WAY); THENCE ALONG THE SAID RIGHT OF WAY WITH A CURVE TURNING TO THE RIGHT WITH AN ARC LENGTH OF 474.33 FEET WITH A RADIUS OF 562.97 FEET WITH A CHORD BEARING OF S 06 DEGREES 40 MINUTES 30 SECONDS E WITH A CHORD LENGTH OF 460.42 FEET TO AN IRON PIN FOUND; THENCE LEAVING THE SAID RIGHT OF WAY N 75 DEGREES 52 MINUTES 20 SECONDS W A DISTANCE OF 157.55 FEET TO A CONCRETE MONUMENT FOUND; THENCE S 03 DEGREES 29 MINUTES 47 SECONDS W A DISTANCE OF 214.81 FEET TO AN IRON PIN SET TO THE SAID RIGHT OF WAY OF HENCART ROAD; THENCE ALONG THE SAID RIGHT OF WAY S 66 DEGREES 55 MINUTES 49 SECONDS W A DISTANCE OF 19.97 FEET TO AN IRON PIN FOUND; THENCE LEAVING THE SAID RIGHT OF WAY AND CONTINUING N 64 DEGREES 06 MINUTES 58 SECONDS W A DISTANCE OF 361.10 FEET TO AN IRON PIN FOUND, WHICH IS THE POINT OF BEGINNING

SAID TRACT OR PARCEL OF LAND CONTAINS 5.811 ACRES AND IS DEPICTED ON THAT ALTA/ACSM PLAT OF SURVEY, BY LANDPRO SURVEYING AND MAPPING, INC., SEALED AND CERTIFIED BY JAMES H. RADER, GRLS NO. 3033, DATED NOVEMBER 5, 2013.




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Exhibit 10.27




Healthcare
Facility Note
Section 232
U.S. Department of Housing
and Urban Development
Office of Residential
Care Facilities
OMB Approval No. 2502-0605
(exp. 03/31/2014)


Public reporting burden for this collection of information is estimated to average 1 hours. This includes the time for collecting, reviewing, and reporting the data. The information is being collected to obtain the supportive documentation which must be submitted to HUD for approval, and is necessary to ensure that viable projects are developed and maintained. The Department will use this information to determine if properties meet HUD requirements with respect to development, operation and/or asset management, as well as ensuring the continued marketability of the properties. This agency may not collect this information, and you are not required to complete this form, unless it displays a currently valid OMB control number.

Warning: Any person who knowingly presents a false, fictitious, or fraudulent statement or claim in a matter within the jurisdiction of the U.S. Department of Housing and Urban Development is subject to criminal penalties, civil liability, and administrative sanctions.



HEALTHCARE FACILITY NOTE
(MULTISTATE)

FHA Project No.: 043-22101
FHA Project Name: Eaglewood Care Center

US $5,678,400.00
as of September 24, 2014


FOR VALUE RECEIVED, the undersigned (“ Borrower ”) jointly and severally (if more than one) promises to pay to the order of HOUSING & HEALTHCARE FINANCE, LLC , a limited liability company organized and existing under the laws of Delaware , the principal sum of FIVE MILLION SIX HUNDRED SEVENTY EIGHT THOUSAND FOUR HUNDRED and NO/100 Dollars (US $5,678,400.00) (the “ Loan ”), with interest on the unpaid principal balance at the Interest Rate.

As used herein, “ Interest Rate ” means the annual rate of THREE and 75/100ths per centum (3.75%).

1. Defined Terms. As used in this Note, (a) the term “ Lender ” means the holder of this Note, (b) the term “ Indebtedness ” means the principal of, interest on, and all other amounts due at any time under this Note, the Borrower’s Security Instrument or any of the other Loan Documents, including prepayment premiums, late charges, default interest, and advances under Section 13 of the Borrower’s Security Instrument to protect the security of the Borrower’s Security Instrument; (c) the term “ Borrower’s Security Instrument ” has the meaning set forth in Section 4 of this Note; and (d) the term “ Program Obligations ” means (1) all applicable statutes and any regulations issued by the U.S. Department of Housing and Urban Development (“ HUD ”) pursuant thereto that apply to the Project, including all amendments to such statutes and regulations, as they become effective, except that changes subject to notice and comment rulemaking shall become effective only upon completion of the rulemaking process, and (2) all current requirements in HUD handbooks and guides, notices, and mortgagee letters that apply to

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the Project, and all future updates, changes and amendments thereto, as they become effective, except that changes subject to notice and comment rulemaking shall become effective only upon completion of the rulemaking process, and provided that such future updates, changes and amendments shall be applicable to the Project only to the extent that they interpret, clarify and implement terms in this Note rather than add or delete provisions from such document. Handbooks, guides, notices, and mortgagee letters are available on HUD’s official website: http://www.hud.gov/offices/adm/hudclips/index.cfm or a successor location to that site.

The definition of any capitalized term or word used herein can be found in this Note and, if not found in this Note, then found in the Healthcare Regulatory Agreement - Borrower between Borrower and HUD (the “ Borrower’s Regulatory Agreement ”) and/or the Borrower’s Security Instrument.

2. Address for Payment. All payments due under this Note shall be payable in immediately available funds at 2 Wisconsin Circle, Ste. 540, Chevy Chase, Maryland 20815, or such other place as may be designated by written notice to Borrower from or on behalf of Lender.

3. Payment of Principal and Interest. Principal and interest shall be paid as follows:

(a) Interest only at the Interest Rate on the principal outstanding for the period beginning on the date of disbursement and ending on and including the last day of the month in which such disbursement is made shall be payable on October 1, 2014. Thereafter, consecutive monthly installments of principal and interest, each in the amount of TWENTY SIX THOUSAND TWO HUNDRED NINETY SEVEN and 56/100 Dollars (US $26,297.56), shall be payable on the first day of each month beginning on November 1, 2014, until the entire unpaid principal balance evidenced by this Note is fully paid. Any remaining principal and interest shall be due and payable on October 1, 2044 or on any earlier date on which the unpaid principal balance of this Note becomes due and payable, by acceleration or otherwise (the "Maturity Date").

(b) Any regularly scheduled monthly installment of principal and interest that is received by Lender before the date it is due shall be deemed to have been received on the due date solely for the purpose of calculating interest due.

4. Security. The Indebtedness is secured by, among other things, that certain Open-End Healthcare Mortgage Deed , Assignment of Leases, Rents and Revenue and Security Agreement, dated as of the date of this Note (the “ Borrower’s Security Instrument ”), and reference is made to the Borrower’s Security Instrument for other rights of Lender as to collateral for the Indebtedness.

5. Application of Payments. If at any time Lender receives, from Borrower or otherwise, any amount applicable to the Indebtedness that is less than all amounts due and payable at such time, Lender shall apply that payment to amounts then due and payable in the manner and in the order set forth in Section 7(a)(3) of the Borrower’s Security Instrument.

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Neither Lender’s acceptance of an amount that is less than all amounts then due and payable nor Lender’s application of such payment in the manner authorized shall constitute or be deemed to constitute either a waiver of the unpaid amounts or an accord and satisfaction. Notwithstanding the application of any such amount to the Indebtedness, Borrower’s obligations under this Note shall remain unchanged.

6. Acceleration. If a Monetary Event of Default occurs and is continuing, for a period of thirty (30) days, the entire unpaid principal balance, any accrued interest and all other amounts payable to Lender under this Note and any of the other Loan Documents shall at once become due and payable, at the option of Lender, without any prior notice to Borrower. If a Covenant Event of Default occurs and the Indebtedness is accelerated as set forth in the Borrower’s Security Instrument, the entire unpaid principal balance, any accrued interest, and all other amounts payable to Lender under this Note and any of the other Loan Documents shall at once become due and payable. Lender may exercise this option to accelerate regardless of any prior forbearance. Upon Lender’s exercise of any right of acceleration under this Note, Borrower shall pay to Lender, in addition to the entire unpaid principal balance of this Note outstanding at the time of the acceleration, all accrued interest and all other sums due Lender under the Loan Documents.

7. Late Charge. If any monthly amount payable under this Note or under the Borrower’s Security Instrument or any of the other Loan Documents is not received by Lender within fifteen (15) days after the amount is due, Borrower shall pay to Lender, immediately and without demand by Lender, a late charge equal to TWO percent (2.00%) of such monthly amount. Borrower acknowledges that its failure to make timely payments will cause Lender to incur additional expenses in servicing and processing the Loan, and that it is extremely difficult and impractical to determine those additional expenses. Borrower agrees that the late charge payable pursuant to this Section represents a fair and reasonable estimate, taking into account all circumstances existing on the date of this Note, of the additional expenses Lender will incur by reason of such late monthly payment.

8. Exculpation; Remedies.

(a) Except for personal liability expressly provided for in this Note or in the Borrower’s Security Instrument or in the Borrower’s Regulatory Agreement, the execution of this Note shall impose no personal liability upon Borrower and ADCARE HEALTH SYSTEMS, INC., a Georgia corporation for payment of the Indebtedness evidenced thereby and in the Event of Default, the holder of this Note shall look solely to the Mortgaged Property in satisfaction of the Indebtedness and will not seek or obtain any deficiency or personal judgment against Borrower and ADCARE HEALTH SYSTEMS, INC., a Georgia corporation except such judgment or decree as may be necessary to foreclose or bar its interest in the Mortgaged Property and all other property mortgaged, pledged, conveyed or assigned to secure payment of the Indebtedness; provided, that nothing in this Section 8 and no action so taken shall operate to impair any obligation of Borrower under the Borrower’s Regulatory Agreement.

(b) Notwithstanding Section 8(a) above, Borrower shall be liable to Lender for any loss or damage suffered by Lender as a result of (1) failure of Borrower to apply all insurance

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proceeds and condemnation proceeds as required by Sections 19 and 20 of the Borrower’s Security Instrument; (2) failure of Borrower to comply with Section 15 of the Borrower’s Security Instrument relating to the delivery of books and records, statements, schedules and reports; (3) Borrower’s acquisition of any property or operation of any business not permitted by Section 33 of the Borrower’s Security Instrument; (4) a transfer or the granting of a lien or encumbrance that is an Event of Default under Sections 17 and 21 of the Borrower’s Security Instrument, other than a transfer consisting solely of the involuntary removal or involuntary withdrawal of a general partner in a limited partnership or a manager in a limited liability company; or (5) fraud or written material misrepresentation by Borrower or any officer, director, general partner, member, manager or employee of Borrower in connection with the Loan Application for or creation of the Indebtedness or any request for any action or consent by Lender. These damages shall be paid only from the available proceeds of an appropriate insurance policy or from Surplus Cash or other escrow accounts.

(c) Notwithstanding Section 8(a) above, Borrower shall provide complete redress as set forth in Section 45(c) of the Borrower’s Security Instrument and shall indemnify and hold harmless the Indemnitees as set forth in Section 48 of the Borrower’s Security Instrument.

9. Voluntary and Involuntary Prepayments.

(a) This Note contains a prepayment restriction and prepayment premium charge acceptable to HUD as to term, amount, and conditions, which are set forth in tbe attached Rider l, including that in the event of a default, pursuant to Program Obligations, HUD may override any lockout or any prepayment premium, or combination thereof, in Rider 1 on the last day of any calendar month during any year in which the prepayment premium is greater than one percent (1.00%) in order to facilitate a partial or full refinancing of the Mortgaged Property and avoid a mortgage insurance claim.

(b) Any application by Lender of any collateral or other security to the repayment of any portion of the unpaid principal balance of this Note prior to the Maturity Date and in the absence of acceleration shall be deemed to be a partial prepayment by Borrower, requiring the payment to Lender by Borrower of a prepayment premium in the amount provided for in Section 9(a) or in Rider 1, as applicable.

(c) Notwithstanding the provisions of subsections (a) and (b) above, no prepayment premium shall be payable with respect to (1) any prepayment made, other than as a result of acceleration, no more than thirty (30) days before the Maturity Date, (2) any prepayment occurring as a result of the application of any insurance proceeds or condemnation award under the Borrower’s Security Instrument, or (3) any reduction in the original principal amount of the Loan, or any prepayment, resulting from any cost certification or other report required by HUD pursuant to Program Obligations.

(d) Any permitted or required prepayment of less than the unpaid principal balance of this Note shall not extend or postpone the due date of any subsequent monthly installments or change the amount of such installments, unless Lender agrees otherwise in writing.

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(e) Borrower acknowledges that the provisions of this Note relating to prepayment restrictions and prepayment premiums are a material part of the consideration for the Loan, and acknowledges that the terms of this Note are in other respects more favorable to Borrower as a result of Borrower’s voluntary agreement to such provisions.

(f) If the Indebtedness is paid in full while insured under the provisions of the National Housing Act, as amended, Borrower shall pay to Lender such adjusted mortgage insurance premium as may be required by Program Obligations.

(g) All payments to reduce the principal balance hereunder, other than regularly scheduled payments of principal, shall be made to Lender in immediately available funds. Payments received after 3:00 PM Eastern time will be deemed to have been received on the next Busine ss Day.

10. Costs and Expenses. Borrower shall pay all expenses and costs, including reasonable fees and out‑of‑pocket expenses of attorneys and expert witnesses and costs of investigation and litigation (including appellate litigation), incurred by Lender as a result of any default under this Note or in connection with efforts to collect any amount due under this Note, or to enforce the provisions of any of the other Loan Documents, including those incurred in post-judgment collection efforts and in any bankruptcy proceeding (including any action for relief from the automatic stay of any bankruptcy proceeding) or judicial or non-judicial foreclosure proceeding.

11. Forbearance. Any forbearance by Lender in exercising any right or remedy under this Note, the Borrower’s Security Instrument, or any of the other Loan Documents, or otherwise afforded by applicable law, shall not be a waiver of or preclude the exercise of any other right or remedy. The acceptance by Lender of payment of all or any part of the Indebtedness after the due date of such payment, or in an amount that is less than the required payment, shall not be a waiver of Lender’s right to require prompt payment when due of all other payments on account of the Indebtedness or to exercise any right or remedy for any failure to make prompt payment. Enforcement by Lender of any security for the Indebtedness shall not constitute an election by Lender of remedies so as to preclude the exercise of any other right or remedy available to Lender.

12. Waivers. Presentment, demand, notice of dishonor, protest, notice of acceleration, notice of intent to demand or accelerate payment or maturity, presentment for payment, notice of nonpayment, grace, and diligence in collecting the Indebtedness are waived by Borrower.

13. Loan Charges. If any applicable law limiting the amount of interest or other charges permitted to be collected from Borrower in connection with the Loan is interpreted so that any interest or other charge provided for in any of the Loan Documents, whether considered separately or together with other charges provided for in any of the Loan Documents, violates that law, and Borrower is entitled to the benefit of that law, then such interest or charge is hereby reduced to the extent necessary to eliminate such violation. The amounts, if any, previously paid to Lender in excess of the permitted amounts shall be applied by Lender to reduce the

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Indebtedness. For the purpose of determining whether any applicable law limiting the amount of interest or other charges permitted to be collected from Borrower has been violated, all of the Indebtedness that constitutes interest, as well as all other charges made in connection with the Indebtedness that constitute interest, shall be deemed to be allocated and spread ratably over the stated term of this Note. Unless otherwise required by applicable law, such allocation and spreading shall be effected in such a manner that the rate of interest so computed is uniform throughout the stated term of this Note.

14. Commercial Purpose. Borrower represents that the Indebtedness is being incurred by Borrower solely for the purpose of carrying on a business or commercial enterprise, and not for personal, family or household purposes.

15. Counting of Days. Except where otherwise specifically provided, any reference in this Note to a period of “ days ” means calendar days, not Business Days.

16. Governing Law; Consent to Jurisdiction and Venue.

(a) This Note and the Borrower’s Security Instrument, if it does not itself expressly identify the law that is to apply to it, shall be governed by the laws of the jurisdiction in which the Land is located (the “ Property Jurisdiction ”), except so long as the Loan is insured or held by HUD, federal law will apply to HUD’s rights and remedies where state or local laws are preempted by federal law.

(b) Borrower agrees that any controversy arising under or in relation to this Note or the Borrower’s Security Instrument shall be litigated exclusively in the Property Jurisdiction except as, so long as the Loan is insured or held by HUD and solely as to rights and remedies of HUD, federal jurisdiction may be appropriate pursuant to any federal requirements. The state courts, and with respect to HUD’s rights and remedies, federal courts and Governmental Authorities in the Property Jurisdiction, shall have exclusive jurisdiction over all controversies which shall arise under or in relation to this Note, any security for the Indebtedness, or the Borrower’s Security Instrument. Borrower irrevocably consents to service, jurisdiction, and venue of such courts for any such litigation and waives any other venue to which it might be entitled by virtue of domicile, habitual residence or otherwise.

17. Rules of Construction. The captions and headings of the Sections of this Note are for convenience only and shall be disregarded in construing this Note. Any reference in this Note to a “ Section ” shall, unless otherwise explicitly provided, be construed as referring, respectively, to a Section of this Note. Use of the singular in this Note includes the plural and use of the plural includes the singular. As used in this Note, the term “ including ” means “including, but not limited to.”

18. Notices. All notices, demands and other communications required or permitted to be given by Lender to Borrower or Borrower to Lender pursuant to this Note shall be given in accordance with Section 31 of the Borrower’s Security Instrument.

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19. Federal Remedies. In addition to any rights and remedies set forth in the Borrower’s Regulatory Agreement, HUD has rights and remedies under federal law so long as HUD is the insurer or holder of the Loan, including but not limited to the right to foreclose pursuant to the Multifamily Mortgage Foreclosure Act of 1981, as amended, 12 U.S.C. § 3701, et seq ., as amended, when HUD is the holder of this Note.

20. Termination of HUD Rights and Remedies. At such time as HUD no longer insures or holds this Note, (a) all rights and responsibilities of HUD shall conclude, all mortgage insurance and references to mortgage insurance premiums, all references to HUD, Ginnie Mae and Program Obligations and related terms and provisions shall cease, and all rights and obligations of HUD shall terminate; (b) all obligations and responsibilities of Borrower to HUD shall likewise terminate; and (c) all obligations and responsibilities of Lender to HUD shall likewise terminate; provided, however, nothing contained in this Section 20 shall in any fashion discharge Borrower from any obligations to HUD under the Borrower’s Regulatory Agreement or Program Obligations or Lender from any obligations to HUD under Program Obligations, which occurred prior to termination of the Contract of Insurance. The provisions of this Section 20 shall be given effect automatically upon the termination of the Contract of Insurance or the transfer of this Note or the Borrower’s Security Instrument by HUD to another party, provided that upon the request of Borrower, Lender or the party to whom this Note or the Borrower’s Security Instrument has been transferred, at no cost to HUD, HUD shall execute such documents as may be reasonably requested to confirm the provisions of this Section 20.


21. WAIVER OF TRIAL BY JURY. BORROWER AND LENDER EACH (a) AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS NOTE OR THE RELATIONSHIP BETWEEN THE PARTIES AS LENDER AND BORROWER THAT IS TRIABLE OF RIGHT BY A JURY AND (b) WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL.


SEE ATTACHED RIDER 1 FOR ADDITIONAL TERMS AND CONDITIONS



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IN WITNESS WHEREOF , Borrower has signed and delivered this Note or has caused this Note to be signed and delivered by its duly authorized representative as of the date first above written.

                
WOODLAND MANOR PROPERTY HOLDINGS, LLC,
a Georgia limited liability company
 
By: /s/ Ronald W. Fleming
Name:Ronald W. Fleming
Its: Manager


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Eaglewood Care Center
Springfield, Clark County, Ohio
FHA Project No. 043-22101

RIDER 1 TO
HEALTHCARE FACILITY NOTE

This RIDER TO HEALTHCARE FACILITY NOTE (this “Rider”) is attached to and incorporated by reference in that certain Healthcare Facility Note executed WOODLAND MANOR PROPERTY HOLDINGS, LLC, a Georgia limited liability company (“Mortgagor”) to the order of HOUSING & HEALTHCARE FINANCE, LLC, a Delaware limited liability company (“Mortgagee”) in the original principal amount of $5,678,400.00 and dated as of September 24, 2014 (the “Note”).

1.
Prepayment

Mortgagor shall not have the right to prepay this Mortgage Note (“Note”), in whole or in part, at any time prior to November 1, 2014. On or after November 1, 2014, Mortgagor shall have the right to prepay the indebtedness evidenced hereby, in whole or in part, subject to the terms hereof. Such prepayment only may be made on the last business day of any calendar month and upon at least thirty (30) days prior written notice to the holder of the Note, which notice shall specify the date on which the prepayment is to be made, the principal amount of such prepayment and the total amount to be paid. In the event of any prepayment of principal at any time on or after November 1, 2014, Mortgagor shall concurrently pay to the holder of the Note (i) interest on the amount prepaid through and including the last day of the month in which the prepayment is made and (ii) a prepayment premium equal to the following designated percentages of the amount of the principal of the Note to be so prepaid with respect to any prepayment which occurs during the following indicated time periods:

Time of Prepayment
Payment Premium
From November 1, 2014 through October 31, 2015
10%
From November 1, 2015 through October 31, 2016
9%
From November 1, 2016 through October 31, 2017
8%
From November 1, 2017 through October 31, 2018
7%
From November 1, 2018 through October 31, 2019
6%
From November 1, 2019 through October 31, 2020
5%
From November 1, 2020 through October 31, 2021
4%
From November 1, 2021 through October 31, 2022
3%
From November 1, 2022 through October 31, 2023
2%
From November 1, 2023 through October 31, 2024
1%
From November 1, 2024 and thereafter
0%


Notwithstanding any partial prepayment of principal made pursuant to the privilege of prepayment set forth in the Note, Mortgagor shall not be relieved of its obligations to make

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scheduled monthly installments of principal and interest as and when such payments are due and payable under the Note.

2.
Exceptions to Prepayment Restrictions .

a.
Avoidance of Mortgage Insurance Claim . Notwithstanding any prepayment prohibition imposed and/or premium required by the Note with respect to prepayments made prior to November 1, 2023, the indebtedness secured hereby may be prepaid in part or in full on the last or first day of any calendar month without the consent of the holder of the Note and without prepayment premium if the U.S. Department of Housing and Urban Development (“HUD”) determines that prepayment will avoid a mortgage insurance claim and is, therefore, in the best interest of the Federal Government. The holder of the Note acknowledges that HUD would consider exercising an override of the prepayment prohibition and/or prepayment premium contained herein only if the following conditions are met:

i.
Mortgagor has defaulted and HUD has received notice as required by the regulations;

ii.
HUD determines that the project financed with the proceeds of the Note (the “Project”) has been experiencing a net income deficiency that has not been caused solely by management inadequacy or lack of owner interest and that is of such a magnitude that Mortgagor is currently unable to made required debt service payments, pay all Project operating expenses and fund all required HUD reserves;

iii.
HUD finds there is reasonable likelihood that Mortgagor can arrange to refinance the defaulted loan at a lower interest rate or otherwise reduce the debt service payments through partial prepayment; and

iv.
HUD determines that refinancing the defaulted loan at a lower rate or partial prepayment is necessary to restore the Project to a financially viable condition and to avoid a full insurance claim.

[ SIGNATURE PAGE FOLLOWS ]

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IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of the date first hereinabove written.


                
WOODLAND MANOR PROPERTY HOLDINGS, LLC,
a Georgia limited liability company
 
By: /s/ Ronald W. Fleming
Name: Ronald W. Fleming
Its: Manager


                






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Exhibit 10.28




Healthcare
Facility Note
Section 232
U.S. Department of Housing
and Urban Development
Office of Residential
Care Facilities
OMB Approval No. 2502-0605
(exp. 03/31/2014)


Public reporting burden for this collection of information is estimated to average 1 hours. This includes the time for collecting, reviewing, and reporting the data. The information is being collected to obtain the supportive documentation which must be submitted to HUD for approval, and is necessary to ensure that viable projects are developed and maintained. The Department will use this information to determine if properties meet HUD requirements with respect to development, operation and/or asset management, as well as ensuring the continued marketability of the properties. This agency may not collect this information, and you are not required to complete this form, unless it displays a currently valid OMB control number.

Warning: Any person who knowingly presents a false, fictitious, or fraudulent statement or claim in a matter within the jurisdiction of the U.S. Department of Housing and Urban Development is subject to criminal penalties, civil liability, and administrative sanctions.



HEALTHCARE FACILITY NOTE
(MULTISTATE)

FHA Project No.: 061-22138
FHA Project Name: Glenvue Health & Rehab Center

US $8,816,800.00
as of September 24, 2014


FOR VALUE RECEIVED, the undersigned (“ Borrower ”) jointly and severally (if more than one) promises to pay to the order of HOUSING & HEALTHCARE FINANCE, LLC , a limited liability company organized and existing under the laws of Delaware , the principal sum of EIGHT MILLION EIGHT HUNDRED SIXTEEN THOUSAND EIGHT HUNDRED and NO/100 Dollars (US $8,816,800.00) (the “ Loan ”), with interest on the unpaid principal balance at the Interest Rate.

As used herein, “ Interest Rate ” means the annual rate of THREE and 75/100ths per centum (3.75%).

1. Defined Terms. As used in this Note, (a) the term “ Lender ” means the holder of this Note, (b) the term “ Indebtedness ” means the principal of, interest on, and all other amounts due at any time under this Note, the Borrower’s Security Instrument or any of the other Loan Documents, including prepayment premiums, late charges, default interest, and advances under Section 13 of the Borrower’s Security Instrument to protect the security of the Borrower’s Security Instrument; (c) the term “ Borrower’s Security Instrument ” has the meaning set forth in Section 4 of this Note; and (d) the term “ Program Obligations ” means (1) all applicable statutes and any regulations issued by the U.S. Department of Housing and Urban Development (“ HUD ”) pursuant thereto that apply to the Project, including all amendments to such statutes and regulations, as they become effective, except that changes subject to notice and comment rulemaking shall become effective only upon completion of the rulemaking process, and (2) all current requirements in HUD handbooks and guides, notices, and mortgagee letters that apply to

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the Project, and all future updates, changes and amendments thereto, as they become effective, except that changes subject to notice and comment rulemaking shall become effective only upon completion of the rulemaking process, and provided that such future updates, changes and amendments shall be applicable to the Project only to the extent that they interpret, clarify and implement terms in this Note rather than add or delete provisions from such document. Handbooks, guides, notices, and mortgagee letters are available on HUD’s official website: http://www.hud.gov/offices/adm/hudclips/index.cfm or a successor location to that site.

The definition of any capitalized term or word used herein can be found in this Note and, if not found in this Note, then found in the Healthcare Regulatory Agreement - Borrower between Borrower and HUD (the “ Borrower’s Regulatory Agreement ”) and/or the Borrower’s Security Instrument.

2. Address for Payment. All payments due under this Note shall be payable in immediately available funds at 2 Wisconsin Circle, Ste. 540, Chevy Chase, Maryland 20815, or such other place as may be designated by written notice to Borrower from or on behalf of Lender.

3. Payment of Principal and Interest. Principal and interest shall be paid as follows:

(a) Interest only at the Interest Rate on the principal outstanding for the period beginning on the date of disbursement and ending on and including the last day of the month in which such disbursement is made shall be payable on October 1, 2014. Thereafter, consecutive monthly installments of principal and interest, each in the amount of FORTY THOUSAND EIGHT HUNDRED THIRTY ONE and 98/100 Dollars (US $40,831.98), shall be payable on the first day of each month beginning on November 1, 2014, until the entire unpaid principal balance evidenced by this Note is fully paid. Any remaining principal and interest shall be due and payable on October 1, 2044 or on any earlier date on which the unpaid principal balance of this Note becomes due and payable, by acceleration or otherwise (the “ Maturity Date ”).

(b) Any regularly scheduled monthly installment of principal and interest that is received by Lender before the date it is due shall be deemed to have been received on the due date solely for the purpose of calculating interest due.

4. Security. The Indebtedness is secured by, among other things, that certain Healthcare Deed to Secure Debt, Assignment of Leases, Rents and Revenue and Security Agreement, dated as of the date of this Note (the “ Borrower’s Security Instrument ”), and reference is made to the Borrower’s Security Instrument for other rights of Lender as to collateral for the Indebtedness.

5. Application of Payments. If at any time Lender receives, from Borrower or otherwise, any amount applicable to the Indebtedness that is less than all amounts due and payable at such time, Lender shall apply that payment to amounts then due and payable in the manner and in the order set forth in Section 7(a)(3) of the Borrower’s Security Instrument. Neither Lender’s acceptance of an amount that is less than all amounts then due and payable nor

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Lender’s application of such payment in the manner authorized shall constitute or be deemed to constitute either a waiver of the unpaid amounts or an accord and satisfaction. Notwithstanding the application of any such amount to the Indebtedness, Borrower’s obligations under this Note shall remain unchanged.

6. Acceleration. If a Monetary Event of Default occurs and is continuing, for a period of thirty (30) days, the entire unpaid principal balance, any accrued interest and all other amounts payable to Lender under this Note and any of the other Loan Documents shall at once become due and payable, at the option of Lender, without any prior notice to Borrower. If a Covenant Event of Default occurs and the Indebtedness is accelerated as set forth in the Borrower’s Security Instrument, the entire unpaid principal balance, any accrued interest, and all other amounts payable to Lender under this Note and any of the other Loan Documents shall at once become due and payable. Lender may exercise this option to accelerate regardless of any prior forbearance. Upon Lender’s exercise of any right of acceleration under this Note, Borrower shall pay to Lender, in addition to the entire unpaid principal balance of this Note outstanding at the time of the acceleration, all accrued interest and all other sums due Lender under the Loan Documents.

7. Late Charge. If any monthly amount payable under this Note or under the Borrower’s Security Instrument or any of the other Loan Documents is not received by Lender within fifteen (15) days after the amount is due, Borrower shall pay to Lender, immediately and without demand by Lender, a late charge equal to TWO percent (2.00%) of such monthly amount. Borrower acknowledges that its failure to make timely payments will cause Lender to incur additional expenses in servicing and processing the Loan, and that it is extremely difficult and impractical to determine those additional expenses. Borrower agrees that the late charge payable pursuant to this Section represents a fair and reasonable estimate, taking into account all circumstances existing on the date of this Note, of the additional expenses Lender will incur by reason of such late monthly payment.

8. Exculpation; Remedies.

(a) Except for personal liability expressly provided for in this Note or in the Borrower’s Security Instrument or in the Borrower’s Regulatory Agreement, the execution of this Note shall impose no personal liability upon Borrower and ADCARE HEALTH SYSTEMS, INC., a Georgia corporation for payment of the Indebtedness evidenced thereby and in the Event of Default, the holder of this Note shall look solely to the Mortgaged Property in satisfaction of the Indebtedness and will not seek or obtain any deficiency or personal judgment against Borrower and ADCARE HEALTH SYSTEMS, INC., a Georgia corporation except such judgment or decree as may be necessary to foreclose or bar its interest in the Mortgaged Property and all other property mortgaged, pledged, conveyed or assigned to secure payment of the Indebtedness; provided, that nothing in this Section 8 and no action so taken shall operate to impair any obligation of Borrower under the Borrower’s Regulatory Agreement.

(b) Notwithstanding Section 8(a) above, Borrower shall be liable to Lender for any loss or damage suffered by Lender as a result of (1) failure of Borrower to apply all insurance proceeds and condemnation proceeds as required by Sections 19 and 20 of the Borrower’s

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Security Instrument; (2) failure of Borrower to comply with Section 15 of the Borrower’s Security Instrument relating to the delivery of books and records, statements, schedules and reports; (3) Borrower’s acquisition of any property or operation of any business not permitted by Section 33 of the Borrower’s Security Instrument; (4) a transfer or the granting of a lien or encumbrance that is an Event of Default under Sections 17 and 21 of the Borrower’s Security Instrument, other than a transfer consisting solely of the involuntary removal or involuntary withdrawal of a general partner in a limited partnership or a manager in a limited liability company; or (5) fraud or written material misrepresentation by Borrower or any officer, director, general partner, member, manager or employee of Borrower in connection with the Loan Application for or creation of the Indebtedness or any request for any action or consent by Lender. These damages shall be paid only from the available proceeds of an appropriate insurance policy or from Surplus Cash or other escrow accounts.

(c) Notwithstanding Section 8(a) above, Borrower shall provide complete redress as set forth in Section 45(c) of the Borrower’s Security Instrument and shall indemnify and hold harmless the Indemnitees as set forth in Section 48 of the Borrower’s Security Instrument.

9. Voluntary and Involuntary Prepayments.

(a) This Note contains a prepayment restriction and prepayment premium charge acceptable to HUD as to term, amount, and conditions, which are set forth in the attached Rider 1 , including that in the event of a default, pursuant to Program Obligations, HUD may override any lockout or any prepayment premium, or combination thereof, in Rider 1 on the last day of any calendar month during any year in which the prepayment premium is greater than one percent (1.00%) in order to facilitate a partial or full refinancing of the Mortgaged Property and avoid a mortgage insurance claim.

(b) Any application by Lender of any collateral or other security to the repayment of any portion of the unpaid principal balance of this Note prior to the Maturity Date and in the absence of acceleration shall be deemed to be a partial prepayment by Borrower, requiring the payment to Lender by Borrower of a prepayment premium in the amount provided for in Section 9(a) or in Rider 1, as applicable.

(c) Notwithstanding the provisions of subsections (a) and (b) above, no prepayment premium shall be payable with respect to (1) any prepayment made, other than as a result of acceleration, no more than thirty (30) days before the Maturity Date, (2) any prepayment occurring as a result of the application of any insurance proceeds or condemnation award under the Borrower’s Security Instrument, or (3) any reduction in the original principal amount of the Loan, or any prepayment, resulting from any cost certification or other report required by HUD pursuant to Program Obligations.

(d) Any permitted or required prepayment of less than the unpaid principal balance of this Note shall not extend or postpone the due date of any subsequent monthly installments or change the amount of such installments, unless Lender agrees otherwise in writing.

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(e) Borrower acknowledges that the provisions of this Note relating to prepayment restrictions and prepayment premiums are a material part of the consideration for the Loan, and acknowledges that the terms of this Note are in other respects more favorable to Borrower as a result of Borrower’s voluntary agreement to such provisions.

(f) If the Indebtedness is paid in full while insured under the provisions of the National Housing Act, as amended, Borrower shall pay to Lender such adjusted mortgage insurance premium as may be required by Program Obligations.

(g) All payments to reduce the principal balance hereunder, other than regularly scheduled payments of principal, shall be made to Lender in immediately available funds. Payments received after 3:00 PM Eastern time will be deemed to have been received on the next Business Day.

10. Costs and Expenses. Borrower shall pay all expenses and costs, including reasonable fees and out‑of‑pocket expenses of attorneys and expert witnesses and costs of investigation and litigation (including appellate litigation), incurred by Lender as a result of any default under this Note or in connection with efforts to collect any amount due under this Note, or to enforce the provisions of any of the other Loan Documents, including those incurred in post-judgment collection efforts and in any bankruptcy proceeding (including any action for relief from the automatic stay of any bankruptcy proceeding) or judicial or non-judicial foreclosure proceeding.

11. Forbearance. Any forbearance by Lender in exercising any right or remedy under this Note, the Borrower’s Security Instrument, or any of the other Loan Documents, or otherwise afforded by applicable law, shall not be a waiver of or preclude the exercise of any other right or remedy. The acceptance by Lender of payment of all or any part of the Indebtedness after the due date of such payment, or in an amount that is less than the required payment, shall not be a waiver of Lender’s right to require prompt payment when due of all other payments on account of the Indebtedness or to exercise any right or remedy for any failure to make prompt payment. Enforcement by Lender of any security for the Indebtedness shall not constitute an election by Lender of remedies so as to preclude the exercise of any other right or remedy available to Lender.

12. Waivers. Presentment, demand, notice of dishonor, protest, notice of acceleration, notice of intent to demand or accelerate payment or maturity, presentment for payment, notice of nonpayment, grace, and diligence in collecting the Indebtedness are waived by Borrower.

13. Loan Charges. If any applicable law limiting the amount of interest or other charges permitted to be collected from Borrower in connection with the Loan is interpreted so that any interest or other charge provided for in any of the Loan Documents, whether considered separately or together with other charges provided for in any of the Loan Documents, violates that law, and Borrower is entitled to the benefit of that law, then such interest or charge is hereby reduced to the extent necessary to eliminate such violation. The amounts, if any, previously paid to Lender in excess of the permitted amounts shall be applied by Lender to reduce the

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Indebtedness. For the purpose of determining whether any applicable law limiting the amount of interest or other charges permitted to be collected from Borrower has been violated, all of the Indebtedness that constitutes interest, as well as all other charges made in connection with the Indebtedness that constitute interest, shall be deemed to be allocated and spread ratably over the stated term of this Note. Unless otherwise required by applicable law, such allocation and spreading shall be effected in such a manner that the rate of interest so computed is uniform throughout the stated term of this Note.

14. Commercial Purpose. Borrower represents that the Indebtedness is being incurred by Borrower solely for the purpose of carrying on a business or commercial enterprise, and not for personal, family or household purposes.

15. Counting of Days. Except where otherwise specifically provided, any reference in this Note to a period of “ days ” means calendar days, not Business Days.

16. Governing Law; Consent to Jurisdiction and Venue.

(a) This Note and the Borrower’s Security Instrument, if it does not itself expressly identify the law that is to apply to it, shall be governed by the laws of the jurisdiction in which the Land is located (the “ Property Jurisdiction ”), except so long as the Loan is insured or held by HUD, federal law will apply to HUD’s rights and remedies where state or local laws are preempted by federal law.

(b) Borrower agrees that any controversy arising under or in relation to this Note or the Borrower’s Security Instrument shall be litigated exclusively in the Property Jurisdiction except as, so long as the Loan is insured or held by HUD and solely as to rights and remedies of HUD, federal jurisdiction may be appropriate pursuant to any federal requirements. The state courts, and with respect to HUD’s rights and remedies, federal courts and Governmental Authorities in the Property Jurisdiction, shall have exclusive jurisdiction over all controversies which shall arise under or in relation to this Note, any security for the Indebtedness, or the Borrower’s Security Instrument. Borrower irrevocably consents to service, jurisdiction, and venue of such courts for any such litigation and waives any other venue to which it might be entitled by virtue of domicile, habitual residence or otherwise.

17. Rules of Construction. The captions and headings of the Sections of this Note are for convenience only and shall be disregarded in construing this Note. Any reference in this Note to a “ Section ” shall, unless otherwise explicitly provided, be construed as referring, respectively, to a Section of this Note. Use of the singular in this Note includes the plural and use of the plural includes the singular. As used in this Note, the term “ including ” means “including, but not limited to.”

18. Notices. All notices, demands and other communications required or permitted to be given by Lender to Borrower or Borrower to Lender pursuant to this Note shall be given in accordance with Section 31 of the Borrower’s Security Instrument.

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19. Federal Remedies. In addition to any rights and remedies set forth in the Borrower’s Regulatory Agreement, HUD has rights and remedies under federal law so long as HUD is the insurer or holder of the Loan, including but not limited to the right to foreclose pursuant to the Multifamily Mortgage Foreclosure Act of 1981, as amended, 12 U.S.C. § 3701, et seq ., as amended, when HUD is the holder of this Note.

20. Termination of HUD Rights and Remedies. At such time as HUD no longer insures or holds this Note, (a) all rights and responsibilities of HUD shall conclude, all mortgage insurance and references to mortgage insurance premiums, all references to HUD, Ginnie Mae and Program Obligations and related terms and provisions shall cease, and all rights and obligations of HUD shall terminate; (b) all obligations and responsibilities of Borrower to HUD shall likewise terminate; and (c) all obligations and responsibilities of Lender to HUD shall likewise terminate; provided, however, nothing contained in this Section 20 shall in any fashion discharge Borrower from any obligations to HUD under the Borrower’s Regulatory Agreement or Program Obligations or Lender from any obligations to HUD under Program Obligations, which occurred prior to termination of the Contract of Insurance. The provisions of this Section 20 shall be given effect automatically upon the termination of the Contract of Insurance or the transfer of this Note or the Borrower’s Security Instrument by HUD to another party, provided that upon the request of Borrower, Lender or the party to whom this Note or the Borrower’s Security Instrument has been transferred, at no cost to HUD, HUD shall execute such documents as may be reasonably requested to confirm the provisions of this Section 20.


21. WAIVER OF TRIAL BY JURY. BORROWER AND LENDER EACH (a) AGREES NOT TO ELECT A TRIAL BY JURY WITH RESPECT TO ANY ISSUE ARISING OUT OF THIS NOTE OR THE RELATIONSHIP BETWEEN THE PARTIES AS LENDER AND BORROWER THAT IS TRIABLE OF RIGHT BY A JURY AND (b) WAIVES ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO SUCH ISSUE TO THE EXTENT THAT ANY SUCH RIGHT EXISTS NOW OR IN THE FUTURE. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS SEPARATELY GIVEN BY EACH PARTY, KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COMPETENT LEGAL COUNSEL.


SEE ATTACHED RIDER 1 FOR ADDITIONAL TERMS AND CONDITIONS

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IN WITNESS WHEREOF , Borrower has signed and delivered this Note or has caused this Note to be signed and delivered by its duly authorized representative as of the date first above written.

                
GLENVUE H&R PROPERTY HOLDINGS, LLC,
a Georgia limited liability company
 
By: /s/ Ronald W. Fleming
Name: Ronald W. Fleming
Its: Manager


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Glenvue Health & Rehab Center
Glennville, Tattnall County, Georgia
FHA Project No. 061-22138

RIDER 1 TO
HEALTHCARE FACILITY NOTE

This RIDER TO HEALTHCARE FACILITY NOTE (this “Rider”) is attached to and incorporated by reference in that certain Healthcare Facility Note executed GLENVUE H&R PROPERTY HOLDINGS, LLC, a Georgia limited liability company (“Mortgagor”) to the order of HOUSING & HEALTHCARE FINANCE, LLC, a Delaware limited liability company (“Mortgagee”) in the original principal amount of $8,816,800.00 and dated as of September 24, 2014 (the “Note”).

1.
Prepayment

Mortgagor shall not have the right to prepay this Mortgage Note (“Note”), in whole or in part, at any time prior to November 1, 2014. On or after November 1, 2014, Mortgagor shall have the right to prepay the indebtedness evidenced hereby, in whole or in part, subject to the terms hereof. Such prepayment only may be made on the last business day of any calendar month and upon at least thirty (30) days prior written notice to the holder of the Note, which notice shall specify the date on which the prepayment is to be made, the principal amount of such prepayment and the total amount to be paid. In the event of any prepayment of principal at any time on or after November 1, 2014, Mortgagor shall concurrently pay to the holder of the Note (i) interest on the amount prepaid through and including the last day of the month in which the prepayment is made and (ii) a prepayment premium equal to the following designated percentages of the amount of the principal of the Note to be so prepaid with respect to any prepayment which occurs during the following indicated time periods:

Time of Prepayment
Payment Premium
From November 1, 2014 through October 31, 2015
10%
From November 1, 2015 through October 31, 2016
9%
From November 1, 2016 through October 31, 2017
8%
From November 1, 2017 through October 31, 2018
7%
From November 1, 2018 through October 31, 2019
6%
From November 1, 2019 through October 31, 2020
5%
From November 1, 2020 through October 31, 2021
4%
From November 1, 2021 through October 31, 2022
3%
From November 1, 2022 through October 31, 2023
2%
From November 1, 2023 through October 31, 2024
1%
From November 1, 2024 and thereafter
0%



Notwithstanding any partial prepayment of principal made pursuant to the privilege of prepayment set forth in the Note, Mortgagor shall not be relieved of its obligations to make

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scheduled monthly installments of principal and interest as and when such payments are due and payable under the Note.

2.
Exceptions to Prepayment Restrictions .

Avoidance of Mortgage Insurance Claim . Notwithstanding any prepayment prohibition imposed and/or premium required by the Note with respect to prepayments made prior to November 1, 2023, the indebtedness secured hereby may be prepaid in part or in full on the last or first day of any calendar month without the consent of the holder of the Note and without prepayment premium if the U.S. Department of Housing and Urban Development (“HUD”) determines that prepayment will avoid a mortgage insurance claim and is, therefore, in the best interest of the Federal Government. The holder of the Note acknowledges that HUD would consider exercising an override of the prepayment prohibition and/or prepayment premium contained herein only if the following conditions are met:

i. Mortgagor has defaulted and HUD has received notice as required by the regulations;

ii. HUD determines that the project financed with the proceeds of the Note (the “Project”) has been experiencing a net income deficiency that has not been caused solely by management inadequacy or lack of owner interest and that is of such a magnitude that Mortgagor is currently unable to made required debt service payments, pay all Project operating expenses and fund all required HUD reserves;

iii. HUD finds there is reasonable likelihood that Mortgagor can arrange to refinance the defaulted loan at a lower interest rate or otherwise reduce the debt service payments through partial prepayment; and

iv. HUD determines that refinancing the defaulted loan at a lower rate or partial prepayment is necessary to restore the Project to a financially viable condition and to avoid a full insurance claim.

[ SIGNATURE PAGE FOLLOWS ]

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IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of the date first hereinabove written.



                
GLENVUE H&R PROPERTY HOLDINGS, LLC,
a Georgia limited liability company
 
By: /s/ Ronald W. Fleming
Name: Ronald W. Fleming
Its: Manager

                


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August 11, 2014


David Rubenstein
230 Spalding Springs Lane
Atlanta, GA 30350

Dear Mr. Rubenstein,

On behalf of AdCare Health Systems, Inc. ("AdCare"}, this letter of separation ("Separation Agreement") outlines the terms of your separation from AdCare. In this Agreement, the terms "you" and "your" refer to you, David Rubenstein, and the terms "us," "we," and "our" refer to AdCare, and are collectively referred to as the "parties." Other than as described below, this Separation Agreement, re-attests the parties' agreement to the terms of your Employment Agreement dated November 15, 2011 that outlines the terms of your employment with AdCare ("Employment Agreement"). The parties agree your last day of employment will be on December 31, 2014 {"Termination Date"). The parties further agree the termination is "Without Cause" as defined in your Employment Agreement.

Please sign the last page and return to David Tenwick, CEO/President, if this offer is acceptable and reflects our entire Separation Agreement. This Separation Agreement is effective upon full execution by the parties ("Effective Date").

Severance: You will be paid one-year annual severance in the amount of your current salary ($325,000) ("Severance") subject to all applicable withholdings, beginning immediately post the Termination Date and expiring December 31, 2015.      In the event of a "Change in Control" as defined in your employment agreement, your Severance will become immediately and fully payable to you.

Bonus: You are eligible for the full amount of your annual bonus outlined in your Employment Agreement and AdCare's Executive Incentive Plan ("Bonus") based on the Company's performance through September 30, 2014. Bonus will be paid to you when 2014 financials are finalized, on or before March 31, 2015.

Equity Compensation/Warrants:      All Warrants granted to you in the Employment Agreement and your Equity Agreement that are fully vested by the Termination Date will become one hundred percent ( 100%) fully exercisable for cash in accordance with the terms of the Warrants. The terms of the Warrants supersede any terms in your Employment Agreement or any other unrelated document(s).



Health Insurance: AdCare will continue to pay you and your spouse's health insurance, in the same amount and for identical coverage as you currently have, for a period of twelve (12) months following the Termination Date. Your health insurance will remain in full effect, unless there is a Change in Control event. In the event of a Change in Control, the amount equal to the premiums for the remainder of the twelve (12) months will be paid to you in a lump sum, on or before the effective date of the Change in Control.

Mobile Phone and Computer: You may keep the mobile phone provided to you during your employment with AdCare at no cost to you, but your cell phone plan must be transferred to your name and paid by you after the Termination Date. You may also purchase your computer and its peripherals for one hundred dollars ($100) on or before your Termination Date.

This Separation Agreement represents the entire agreement between the parties, and any modifications must be made in writing and executed by both parties. Please do not hesitate to contact me if you have related questions.


Regards,
 
 
 
 
 
  /s/ David A. Tenwick
 
 
David Tenwick, CEO
 
 
 
 
 
 
 
 
 
 


I accept the Separation Agreement as outlined above.
 
 
 
 
 
  /s/ David Rubenstein
 
8/14/14
 
David Rubenstein
Date
 




Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULES 13a-14(A) AND 15d-14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934


I, William McBride III, certify that:
 
1.   I have reviewed this Form 10-Q for the quarter ended September 30, 2014 , of AdCare Health Systems, Inc.;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a.               Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b.               Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c.                Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d.               Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
 
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a.               All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b.               Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:
November 13, 2014
 
/s/ William McBride III
 
 
 
William McBride III
 
 
 
Chief Executive Officer




Exhibit 31.2
CERTIFICATION OF CHIEF ACCOUNTING OFFICER
PURSUANT TO RULES 13a-14(A) AND 15d-14(A)
OF THE SECURITIES EXCHANGE ACT OF 1934

I, Sheryl A. Wolf, certify that:
 
1.   I have reviewed this Form 10-Q for the quarter ended September 30, 2014 of AdCare Health Systems, Inc.;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a.               Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b.               Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c.                Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d.               Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
 
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a.               All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b.               Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date:
November 13, 2014
 
/s/ Sheryl A. Wolf
 
 
 
Sheryl A. Wolf
 
 
 
Chief Accounting Officer




Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of AdCare Health Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2014 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William McBride III, Chief Executive Officer of the Company, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, hereby certify, that to the best of my knowledge:
 
1.               The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2.               The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
Date:
November 13, 2014
 
/s/ William McBride III
 
 
 
William McBride III
 
 
 
Chief Executive Officer




Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of AdCare Health Systems, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2014 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sheryl A. Wolf, Chief Accounting Officer of the Company, pursuant to 18 U.S.C. § 1350, as adopted by § 906 of the Sarbanes-Oxley Act of 2002, hereby certify, that to the best of my knowledge:
 
1.               The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
2.               The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
Date:
November 13, 2014
 
/s/ Sheryl A. Wolf
 
 
 
Sheryl A. Wolf
 
 
 
Chief Accounting Officer